principles
by ray dalio 



Thank you for downloading this Simon & Schuster
ebook.
Get a FREE ebook when you join our mailing list. Plus, get updates on new releases,
deals, recommended reads, and more from Simon & Schuster. Click below to sign up and
see terms and conditions.
CLICK HERE TO SIGN UP
Already a subscriber? Provide your email again so we can register this ebook and send
you more of what you like to read. You will continue to receive exclusive offers in your
inbox.

PART I
WHERE I’M COMING FROM
1 My Call to Adventure: 1949–1967
2 Crossing the Threshold: 1967–1979
3 My Abyss: 1979–1982
4 My Road of Trials: 1983–1994
5 The Ultimate Boon: 1995–2010
6 Returning the Boon: 2011–2015
7 My Last Year and My Greatest Challenge: 2016–2017
8 Looking Back from a Higher Level
PART II
LIFE PRINCIPLES
1 Embrace Reality and Deal with It
2 Use the 5-Step Process to Get What You Want Out of Life
3 Be Radically Open-Minded
4 Understand That People Are Wired Very Differently
5 Learn How to Make Decisions Effectively
Life Principles: Putting It All Together
Summary and Table of Life Principles
PART III
WORK PRINCIPLES
Summary and Table of Work Principles
TO GET THE CULTURE RIGHT . . .
1 Trust in Radical Truth and Radical Transparency
2 Cultivate Meaningful Work and Meaningful Relationships
3 Create a Culture in Which It Is Okay to Make Mistakes and Unacceptable Not to
Learn from Them
4 Get and Stay in Sync
5 Believability Weight Your Decision Making
6 Recognize How to Get Beyond Disagreements
TO GET THE PEOPLE RIGHT . . .
7 Remember That the WHO Is More Important than the WHAT
8 Hire Right, Because the Penalties for Hiring Wrong Are Huge
9 Constantly Train, Test, Evaluate, and Sort People
TO BUILD AND EVOLVE YOUR MACHINE . . .
10 Manage as Someone Operating a Machine to Achieve a Goal
11 Perceive and Don’t Tolerate Problems
12 Diagnose Problems to Get at Their Root Causes
13 Design Improvements to Your Machine to Get Around Your Problems
14 Do What You Set Out to Do
15 Use Tools and Protocols to Shape How Work Is Done
16 And for Heaven’s Sake, Don’t Overlook Governance!
Work Principles: Putting It All Together
ACKNOWLEDGMENTS
ABOUT THE AUTHOR
CONCLUSION
APPENDIX: TOOLS AND PROTOCOLS FOR BRIDGEWATER’S IDEA MERITOCRACY
BIBLIOGRAPHY
INDEX
To Barbara, the half of me who has made me whole for more than
forty years.
INTRODUCTION
Before I begin telling you what I think, I want to establish that I’m a “dumb
shit” who doesn’t know much relative to what I need to know. Whatever success
I’ve had in life has had more to do with my knowing how to deal with my not
knowing than anything I know. The most important thing I learned is an
approach to life based on principles that helps me find out what’s true and what
to do about it.
I’m passing along these principles because I am now at the stage in my life in
which I want to help others be successful rather than to be more successful
myself. Because these principles have helped me and others so much, I want to
share them with you. It’s up to you to decide how valuable they really are and
what, if anything, you want to do with them.
Principles are fundamental truths that serve as the foundations for behavior
that gets you what you want out of life. They can be applied again and again in
similar situations to help you achieve your goals.
Every day, each of us is faced with a blizzard of situations we must respond
to. Without principles we would be forced to react to all the things life throws at
us individually, as if we were experiencing each of them for the first time. If
instead we classify these situations into types and have good principles for
dealing with them, we will make better decisions more quickly and have better
lives as a result. Having a good set of principles is like having a good collection
of recipes for success. All successful people operate by principles that help them
be successful, though what they choose to be successful at varies enormously, so
their principles vary.
To be principled means to consistently operate with principles that can be
clearly explained. Unfortunately, most people can’t do that. And it’s very rare
for people to write their principles down and share them. That is a shame. I
would love to know what principles guided Albert Einstein, Steve Jobs, Winston
Churchill, Leonardo da Vinci, and others so I could clearly understand what they
were going after and how they achieved it and could compare their different
approaches. I’d like to know which principles are most important to the
politicians who want me to vote for them and to all the other people whose
decisions affect me. Do we have common principles that bind us together—as a
family, as a community, as a nation, as friends across nations? Or do we have
opposing principles that divide us? What are they? Let’s be specific. This is a
time when it is especially important for us to be clear about our principles.
My hope is that reading this book will prompt you and others to discover your
own principles from wherever you think is best and ideally write them down.
Doing that will allow you and others to be clear about what your principles are
and understand each other better. It will allow you to refine them as you
encounter more experiences and to reflect on them, which will help you make
better decisions and be better understood.
HAVING YOUR OWN PRINCIPLES
We come by our principles in different ways. Sometimes we gain them through
our own experiences and reflections. Sometimes we accept them from others,
like our parents, or we adopt holistic packages of principles, such as those of
religions and legal frameworks.
Because we each have our own goals and our own natures, each of us must
choose our own principles to match them. While it isn’t necessarily a bad thing
to use others’ principles, adopting principles without giving them much thought
can expose you to the risk of acting in ways inconsistent with your goals and
your nature. At the same time, you, like me, probably don’t know everything
you need to know and would be wise to embrace that fact. If you can think for
yourself while being open-minded in a clearheaded way to find out what is best
for you to do, and if you can summon up the courage to do it, you will make the
most of your life. If you can’t do that, you should reflect on why that is, because
that’s most likely your greatest impediment to getting more of what you want
out of life.
That brings me to my first principle:
• Think for yourself to decide 1) what you want, 2)
what is true, and 3) what you should do to achieve
#1 in light of #2 . . .
. . . and do that with humility and open-mindedness so that you consider the best thinking
available to you. Being clear on your principles is important because they will
affect all aspects of your life, many times a day. For example, when you enter
into relationships with others, your principles and their principles will determine
how you interact. People who have shared values and principles get along.
People who don’t will suffer through constant misunderstandings and conflicts.
Think about the people you are closest to: Are their values aligned with yours?
Do you even know what their values or principles are? Too often in
relationships, people’s principles aren’t clear. This is especially problematic in
organizations where people need to have shared principles to be successful.
Being crystal clear about my principles is why I labored so much over every
sentence in this book.
The principles you choose can be anything you want them to be as long as
they are authentic—i.e., as long as they reflect your true character and values.
You will be faced with millions of choices in life, and the way you make them
will reflect the principles you have—so it won’t be long before the people
around you will be able to tell the principles you are really operating by. The
worst thing you can be is a phony, because if you’re a phony you will lose
people’s trust and your own self-respect. So you must be clear about your
principles and then you must “walk the talk.” If inconsistencies seem to exist,
you should explain them. It’s best to do that in writing because by doing so, you
will refine your written principles.
While I will be sharing my own principles, I want to make clear to you that I
don’t expect you to follow them blindly. On the contrary, I want you to question
every word and pick and choose among these principles so you come away with
a mix that suits you.
MY PRINCIPLES AND HOW I LEARNED THEM
I learned my principles over a lifetime of making a lot of mistakes and spending
a lot of time reflecting on them. Since I was a kid, I’ve been a curious,
independent thinker who ran after audacious goals. I got excited about
visualizing things to go after, had some painful failures going after them, learned
principles that would prevent me from making the same sort of mistakes again,
and changed and improved, which allowed me to imagine and go after even
more audacious goals and do that rapidly and repeatedly for a long time. So to
me life looks like the sequence you see on the opposite page.
I believe that the key to success lies in knowing how to both strive for a lot
and fail well. By failing well, I mean being able to experience painful failures
that provide big learnings without failing badly enough to get knocked out of the
game.
This way of learning and improving has been best for me because of what I’m
like and because of what I do. I’ve always had a bad rote memory and didn’t like
following other people’s instructions, but I loved figuring out how things work
for myself. I hated school because of my bad memory but when I was twelve I
fell in love with trading the markets. To make money in the markets, one needs
to be an independent thinker who bets against the consensus and is right. That’s
because the consensus view is baked into the price. One is inevitably going to be
painfully wrong a lot, so knowing how to do that well is critical to one’s success.
To be a successful entrepreneur, the same is true: One also has to be an
independent thinker who correctly bets against the consensus, which means
being painfully wrong a fair amount. Since I was both an investor and an
entrepreneur, I developed a healthy fear of being wrong and figured out an
approach to decision making that would maximize my odds of being right.
• Make believability-weighted decisions.
My painful mistakes shifted me from having a perspective of “I know I’m right”
to having one of “How do I know I’m right?” They gave me the humility I
needed to balance my audacity. Knowing that I could be painfully wrong and
curiosity about why other smart people saw things differently prompted me to
look at things through the eyes of others as well as my own. That allowed me to
see many more dimensions than if I saw things just through my own eyes.
Learning how to weigh people’s inputs so that I chose the best ones—in other
words, so that I believability weighted my decision making—increased my
chances of being right and was thrilling. At the same time, I learned to:
• Operate by principles . . .
. . . that are so clearly laid out that their logic can easily be assessed and you and others
can see if you walk the talk. Experience taught me how invaluable it is to reflect on
and write down my decision-making criteria whenever I made a decision, so I
got in the habit of doing that. With time, my collection of principles became like
a collection of recipes for decision making. By sharing them with the people at
my company, Bridgewater Associates, and inviting them to help me test my
principles in action, I continually refined and evolved them. In fact, I was able to
refine them to the point that I could see how important it is to:
• Systemize your decision making.
I discovered I could do that by expressing my decision-making criteria in the
form of algorithms that I could embed into our computers. By running both
decision-making systems—i.e., mine in my head and mine in the computer—
next to each other, I learned the computer could make better decisions than me
because it could process vastly more information than I could, and it could do it
faster and unemotionally. Doing that allowed me and the people I worked with
to compound our understanding over time and improve the quality of our
collective decision making. I discovered that such decision-making systems—
especially when believability weighted—are incredibly powerful and will soon
profoundly change how people around the world make all kinds of decisions.
Our principle-driven approach to decision making has not only improved our
economic, investment, and management decisions, it has helped us make better
decisions in every aspect of our lives.
Whether or not your own principles are systemized/computerized is of secondary
importance. The most important thing is that you develop your own principles
and ideally write them down, especially if you are working with others.
It was that approach and the principles it yielded, and not me, that took me
from being an ordinary middle-class kid from Long Island to being successful by
a number of conventional measures—like starting a company out of my twobedroom apartment and building it into the fifth most important private company
in the U.S. (according to Fortune), becoming one of the one hundred richest
people in the world (according to Forbes), and being considered one of the one
hundred most influential (according to Time). They led me to a perch from
which I got to see success and life very differently than I had imagined, and they
gave me the meaningful work and meaningful relationships I value even more
than my conventional successes. They gave me and Bridgewater far more than I
ever dreamed of.
Until recently, I didn’t want to share these principles outside of Bridgewater
because I don’t like public attention and because I thought it would be
presumptuous to tell others what principles to have. But after Bridgewater
successfully anticipated the financial crisis of 2008–09, I got a lot of media
attention and so did my principles and Bridgewater’s unique way of operating.
Most of those stories were distorted and sensationalistic, so in 2010, I posted our
principles on our website so people could judge them for themselves. To my
surprise, they were downloaded over three million times and I was flooded with
thank-you letters from all over the world.
I will give them to you in two books—Life and Work Principles in one book,
and Economic and Investment Principles in the other.
HOW THESE BOOKS ARE ORGANIZED
Since I have spent most of my adult life thinking about economies and investing,
I considered writing Economic and Investment Principles first. But I decided to
begin with my Life and Work Principles because they’re more overarching and
I’ve seen how well they work for people, independent of their careers. Since
they go so well together, they are combined here in one book prefaced by a short
autobiography, Where I’m Coming From.
Part I: Where I’m Coming From
In this part, I share some of the experiences—most importantly, my mistakes—
that led me to discover the principles that guide my decision making. To tell you
the truth, I still have mixed feelings about telling my personal story, because I
worry that it might distract you from the principles themselves and from the
timeless and universal cause-effect relationships that inform them. For that
reason, I wouldn’t mind if you decided to skip this part of the book. If you do
read it, try to look past me and my particular story to the logic and merit of the
principles I describe. Think about them, weigh them, and decide how much, if at
all, they apply to you and your own life circumstances—and specifically,
whether they can help you achieve your goals, whatever they may be.
Part II: Life Principles
The overarching principles that drive my approach to everything are laid out in
Life Principles. In this section, I explain my principles in greater depth and show
how they apply in the natural world, in our private lives and relationships, in
business and policymaking, and of course at Bridgewater. I’ll share the 5-Step
Process I’ve developed for achieving one’s goals and making effective choices;
I’ll also share some of the insights I’ve gained into psychology and neuroscience
and explain how I’ve applied them in my private life and in my business. This is
the real heart of the book because it shows how these principles can be applied
to most anything by most anyone.
Part III: Work Principles
In Work Principles, you’ll get a close-up view of the unusual way we operate at
Bridgewater. I will explain how we’ve coalesced our principles into an idea
meritocracy that strives to deliver meaningful work and meaningful relationships
through radical truth and radical transparency. I’ll show you how this works at
a granular level and how it can be applied to nearly any organization to make it
more effective. As you will see, we are simply a group of people who are
striving to be excellent at what we do and who recognize that we don’t know
much relative to what we need to know. We believe that thoughtful, unemotional
disagreement by independent thinkers can be converted into believabilityweighted decision making that is smarter and more effective than the sum of its
parts. Because the power of a group is so much greater than the power of an
individual, I believe these work principles are even more important than the life
principles on which they’re based.
What Will Follow This Book
This print book will be followed by an interactive book in the form of an app
that will take you into videos and immersive experiences so that your learning is
more experiential. The app will also get to know you through your interactions
with it in order to provide you with more personalized advice.
This book and the app will be followed by another volume containing two
other parts, Economic and Investment Principles, in which I will pass along the
principles that have worked for me and that I believe might help you in these
areas.
After that, there will be no advice I can give that will not be available in these
two books, and I will be done with this phase of my life.
Think for yourself!
1) What do you want?
2) What is true?
3) What are you going to do about it?
PART I
WHERE I’M COMING
FROM
Time is like a river that carries us forward
into encounters with reality that require us to
make decisions. We can’t stop our movement
down this river and we can’t avoid those
encounters. We can only approach them in the
best possible way.
When we are children, other people, typically our parents, guide us through our
encounters with reality. As we get older, we begin to make our own choices. We
choose what we are going after (our goals), and that influences our paths. If you
want to be a doctor, you go to medical school; if you want to have a family, you
find a mate; and so on. As we move toward these goals, we encounter problems,
make mistakes, and run up against our own personal weaknesses. We learn about
ourselves and about reality and make new decisions. Over the course of our
lives, we make millions and millions of decisions that are essentially bets, some
large and some small. It pays to think about how we make them because they are
what ultimately determine the quality of our lives.
We are all born with different thinking abilities but we aren’t born with
decision-making skills. We learn them from our encounters with reality. While
the path I went down is unique—being born to particular parents, pursuing a
particular career, having particular colleagues—I believe that the principles I
learned along the way will work equally well for most people on most paths. As
you read my story, try to look through it and me to the underlying cause-andeffect relationships—at the choices I made and their consequences, what I
learned from them, and how I changed the ways I make decisions as a result.
Ask yourself what you want, seek out examples of other people who got what
they wanted, and try to discern the cause-and-effect patterns behind their
achievements so you can apply them to help you achieve your own goals.
To help you understand where I’m coming from, I am giving you an
unvarnished account of my life and career, placing special emphasis on my
mistakes and weaknesses and the principles I learned from them.
CHAPTER 1
MY CALL TO ADVENTURE:
1949–1967
I was born in 1949 and grew up in a middle-class Long Island neighborhood, the
only son of a professional jazz musician and a stay-at-home mom. I was an
ordinary kid in an ordinary house and a worse-than-ordinary student. I loved
playing around with my pals—touch football in the streets and baseball in a
neighbor’s backyard when I was young, and chasing girls when I got older.
Our DNA gives us our innate strengths and weaknesses. My most obvious
weakness was my bad rote memory. I couldn’t, and still can’t, remember facts
that don’t have reasons for being what they are (like phone numbers), and I don’t
like following instructions. At the same time, I was very curious and loved to
figure things out for myself, though that was less obvious at the time.
I didn’t like school, not just because it required a lot of memorization, but
because I wasn’t interested in most of the things my teachers thought were
important. I never understood what doing well in school would get me other than
my mother’s approval.
My mother adored me and worried about my poor grades. Up until middle
school, she would make me go to my room and study for a couple of hours
before going out to play, but I couldn’t bring myself to do it. She was always
there for me. She folded and rubber-banded the newspapers I delivered and
baked cookies for the two of us to eat while we watched horror movies together
on Saturday nights. She died when I was nineteen. At the time, I couldn’t
imagine ever laughing again. Now when I think of her I smile.
My dad worked very late hours as a musician—until about three in the
morning—so he slept late on weekends. As a result, we didn’t have much of a
relationship when I was young other than him constantly nagging me to take
care of chores like mowing the lawn and cutting the hedges, which I hated. He
was a responsible man dealing with an irresponsible kid. Memories of how we
interacted seem funny to me today. For example, one time he told me to cut the
grass and I decided to do just the front yard and postpone doing the back, but
then it rained for a couple of days and the backyard grass became so high I had
to cut it with a sickle. That took so long that by the time I was finished, the front
yard was too high to mow, and so on.
After my mother died, my dad and I became very close, especially when I
started my own family. I both liked and loved him. He had a casual, fun way
about him the way musicians tend to, and I admired his strong character, which I
assume came from living through the Great Depression and fighting in both
World War II and the Korean War. I have memories of him from when he was in
his seventies, not hesitating to drive through big snowstorms, shoveling himself
out whenever he got stuck like it was no big deal. After playing in clubs and
cutting records for most of his life, he began a second career in his midsixties,
teaching music in high school and at a local community college, which he
continued until he had a heart attack at eighty-one. He lived another decade after
that, as sharp as ever mentally.
When I didn’t want to do something, I would fight it, but when I was excited
about something, nothing could hold me back. For example, while I resisted
doing chores at home, I eagerly did them outside the house to earn money.
Starting at age eight, I had a newspaper route, shoveled snow off people’s
driveways, caddied, bussed tables and washed dishes at a local restaurant, and
stocked shelves at a nearby department store. I don’t remember my parents
encouraging me to do these jobs so I can’t say how I came by them. But I do
know that having those jobs and having some money to handle independently in
those early years taught me many valuable lessons I wouldn’t have learned in
school or at play.
In my early years the psychology of the 1960s U.S. was aspirational and
inspirational—to achieve great and noble goals. It was like nothing I have seen
since. One of my earliest memories was of John F. Kennedy, an intelligent,
charismatic man who painted vivid pictures of changing the world for the better
—exploring outer space, achieving equal rights, and eliminating poverty. He and
his ideas had a major effect on my thinking.
The United States was then at its peak relative to the rest of the world,
accounting for 40 percent of its economy compared to about 20 percent today;
the dollar was the world’s currency; and the U.S. was the dominant military
power. Being “liberal” meant being committed to moving forward in a fast and
fair way, while being “conservative” meant being stuck in old and unfair ways—
at least that’s how it seemed to me and to most of the people around me. As we
saw it, the U.S. was rich, progressive, well managed, and on a mission to
improve quickly at everything. I might have been naive but I wasn’t alone.
In those years, everyone was talking about the stock market, because it was
doing great and people were making money. This included the people playing at
a local golf course called Links where I started caddying when I was twelve. So I
took my caddying money and started playing the stock market. My first
investment was in Northeast Airlines. I bought it because it was the only
company I’d heard of that was selling for less than $5 a share. I figured the more
shares I bought, the more money I would make. That was a dumb strategy, but I
tripled my money. Northeast Airlines was actually about to go broke and another
company acquired it. I got lucky, but I didn’t know it at the time. I just thought
making money in the markets was easy, so I was hooked.
In those days, Fortune magazine had a little tear-out coupon you could mail
in to get free annual reports from Fortune 500 companies. I ordered them all. I
can still remember watching the mailman unhappily lugging all those reports to
our door, and I dug into every one of them. That was how I began building an
investment library. As the stock market continued to climb, World War II and
the Depression seemed like distant memories and investing seemed like simply a
matter of buying anything and watching it go up. It would certainly go up, the
common knowledge held, because managing the economy had developed into a
science. After all, stocks had nearly quadrupled over the previous ten years, and
some had done much better than that.
As a result, “dollar-cost averaging”—investing essentially the same dollar
amount in the market every month, no matter how few or many shares it could
buy—was the strategy most people followed. Of course, picking the best stocks
was even better, so that’s what I and everyone else tried to do. There were
thousands to choose from, all neatly listed on the last few pages of the
newspaper.
While I liked playing the markets, I also loved playing around with my
friends, whether in the neighborhood when I was a kid, using fake IDs to get into
bars when we were teens, or, nowadays, going to music festivals and on scubadiving trips together. I’ve always been an independent thinker inclined to take
risks in search of rewards—not just in the markets, but in most everything. I also
feared boredom and mediocrity much more than I feared failure. For me, great is
better than terrible, and terrible is better than mediocre, because terrible at least
gives life flavor. The high school yearbook quote my friends chose for me was
from Thoreau: “If a man does not keep pace with his companions, perhaps it is
because he hears a different drummer. Let him step to the music which he hears,
however measured or far away.”
In 1966, my senior year of high school, the stock market was still booming
and I was making money and having a blast, cutting school with my best friend
Phil to go surfing, and doing what fun-loving high school boys usually do. Of
course I didn’t know it then, but that year was to be the stock market’s top. After
that, almost everything I thought I knew about the markets was proven wrong.
1 A surprise simultaneous attack by the North Vietnamese on more than one hundred cities and towns in
South Vietnam.
CHAPTER 2
CROSSING THE THRESHOLD:
1967–1979
I came into this period with the biases I had picked up from my experiences and
the people around me. In 1966, asset prices reflected investors’ optimism about
the future. But between 1967 and 1979, bad economic surprises led to big and
unexpected price declines. Not just the economy and the markets but social
sentiment deteriorated as well. Living through that taught me that while almost
everyone expects the future to be a slightly modified version of the present, it is
usually very different. But I didn’t know that in 1967. Certain that stocks would
eventually rebound, I kept buying them, even as the market fell and I lost money
until I figured out what was going wrong and how to deal with it. I gradually
learned that prices reflect people’s expectations, so they go up when actual
results are better than expected and they go down when they are worse than
expected. And most people tend to be biased by their recent experiences.
That fall, I started at a local college, C. W. Post. I got in on probation because
of my C average in high school. But unlike high school, I loved college because
I could learn about things that interested me, not because I had to, so I got great
grades. I also loved living away from home and having independence.
Learning to meditate helped too. When the Beatles visited India in 1968 to
study Transcendental Meditation at the ashram of Maharishi Mahesh Yogi, I was
curious to learn it, so I did. I loved it. Meditation has benefited me hugely
throughout my life because it produces a calm open-mindedness that allows me
to think more clearly and creatively.
I majored in finance in college because of my love for the markets and
because that major had no foreign language requirement—so it allowed me to
learn what I was interested in, both inside and outside class. I learned a lot about
commodity futures from a very interesting classmate, a Vietnam veteran quite a
bit older than me. Commodities were attractive because they could be traded
with very low margin requirements, meaning I could leverage the limited
amount of money I had to invest. If I could make winning decisions, which I
planned to do, I could borrow more to make more. Stock, bond, and currency
futures didn’t exist back then. Commodity futures were strictly real commodities
like corn, soybeans, cattle, and hogs. So those were the markets I started to trade
and learn about.
My college years coincided with the era of free love, mind-expanding drug
experimentation, and rejection of traditional authority. Living through it had a
lasting effect on me and many other members of my generation. For example, it
deeply impacted Steve Jobs, whom I came to empathize with and admire. Like
me, he took up meditation and wasn’t interested in being taught as much as he
loved visualizing and building out amazing new things. The times we lived in
taught us both to question established ways of doing things—an attitude he
demonstrated superbly in Apple’s iconic “1984” and “Here’s to the Crazy
Ones,” which were ad campaigns that spoke to me.
For the country as a whole, those were difficult years. As the draft expanded
and the numbers of young men coming home in body bags soared, the Vietnam
War split the country. There was a lottery based on birthdates to determine the
order of those who would be drafted. I remember listening to the lottery on the
radio while playing pool with my friends. It was estimated that the first 160 or so
birthdays called would be drafted, though they read off all 366 dates. My
birthday was forty-eighth.
I wasn’t smart enough to be afraid of going to war because I naively thought
nothing bad could happen to me, but I didn’t want to go because I was charging
forward with my life and to put it on hold for two years seemed like an eternity.
My dad, though, was adamantly against the war and hell-bent against me going,
even though he had believed in and fought in the prior two wars. He had me
examined by a doctor who discovered I had hypoglycemia, which gave me an
exemption. When I look back on that, I see that I got out of serving on a
technicality—that my dad was essentially helping me dodge the draft—which
now gives me mixed feelings. I feel guilty I didn’t do my part, relieved I didn’t
experience the harmful consequences so many others suffered from the war, and
appreciative of my dad for the love behind his effort to protect me. I have no
idea what I’d do if I were faced with the same situation today.
As America’s politics and economy deteriorated, the country’s mood became
depressed. The Tet Offensive in January 19681 seemed to convey the U.S. was
losing the war; that same year Lyndon Johnson decided not to run for a second
term and Richard Nixon was elected, beginning an even more difficult era. At
the same time, France’s president Charles de Gaulle was turning in his country’s
dollars for gold because he was concerned the U.S. was printing money to
finance its spending. Watching the news and the market move together, I began
to see the whole picture and understand the cause-effect relationship between the
two.
Around 1970 or 1971, I noticed gold was starting to tick up in world markets.
Until then, like most people, I hadn’t paid much attention to currency rates
because the currency system had been stable throughout my lifetime. But as
currency events increasingly appeared in the news, they caught my attention. I
learned that other currencies were fixed against the dollar, that the dollar was
fixed against gold, that Americans weren’t allowed to own gold (though I wasn’t
sure why), and that other central banks could convert their paper dollars into
gold, which was how they were assured that they wouldn’t be hurt if the U.S.
printed too many dollars. I heard our government officials pooh-pooh the
worries about the dollar and the excitement about gold, assuring us that the
dollar was sound and that gold was just an archaic metal. Speculators were
behind the rising gold prices, they said, and they would get burned once things
settled down. Back then, I still assumed that government officials were honest.
In the spring of 1971, I graduated college with a nearly perfect grade point
average, which got me into Harvard Business School. The summer before I
started at HBS, I got a job as a clerk on the floor of the New York Stock
Exchange. By midsummer, the dollar problem began to reach a breaking point.
There were reports that Europeans wouldn’t accept dollars from American
tourists. The global monetary system was in the process of breaking down, but
that wasn’t clear to me quite yet.
Then, on Sunday, August 15, 1971, President Nixon went on television to
announce that the U.S. would renege on its promise to allow dollars to be turned
in for gold, which led the dollar to plummet. Since government officials had
promised not to devalue the dollar, I listened with amazement as he spoke.
Instead of addressing the fundamental problems behind the pressure on the
dollar, he continued to blame speculators, crafting his words to make it sound
like he was moving to support the dollar while his actions were doing just the
opposite. “Floating it,” as Nixon was doing, and then letting it sink like a stone,
looked a lot like a lie to me. Over the decades since, I’ve repeatedly seen
policymakers deliver such assurances immediately before currency devaluations,
so I learned not to believe government policymakers when they assure you that
they won’t let a currency devaluation happen. The more strongly they make
those assurances, the more desperate the situation probably is, so the more likely
it is that a devaluation will take place.
As I listened to Nixon speak, I wondered what those developments meant.
Money as we’d known it—a claim check to get gold—no longer existed. That
couldn’t be good. It seemed clear to me that the era of promise that Kennedy had
personified was unraveling.
Monday morning I walked onto the floor of the exchange expecting
pandemonium. There was pandemonium all right, but not the sort I expected:
Instead of falling, the stock market jumped about 4 percent, a significant daily
gain.
To try to understand what was happening, I spent the rest of that summer
studying past currency devaluations. I learned that everything that was going on
—the currency breaking its link to gold and devaluing, the stock market soaring
in response—had happened before, and that logical cause-effect relationships
made those developments inevitable. My failure to anticipate this, I realized, was
due to my being surprised by something that hadn’t happened in my lifetime,
though it had happened many times before. The message that reality was
conveying to me was “You better make sense of what happened to other people
in other times and other places because if you don’t you won’t know if these
things can happen to you and, if they do, you won’t know how to deal with
them.”
Enrolling at Harvard Business School that fall, I was excited about meeting
the extraordinarily intelligent people from all over the planet who would be my
classmates. And high as my expectations were, the experience was even better. I
lived with people from all over the world and we partied together in an exciting,
eclectic environment. There was no teacher in front of a blackboard telling us
what to remember and no tests to see whether we remembered it. Instead we
were given actual case studies to read and analyze. Then we gathered in groups
to thrash out what we would do if we were in the shoes of the people in those
situations. This was my kind of school!
Meanwhile, thanks to the wave of money printing that had followed the
demise of the gold standard, the economy and the stock market were soaring.
Stocks were in again in 1972, and the fashion at the time was the Nifty 50. This
group of fifty stocks had fast and steady earnings growth and were widely
believed to be a sure thing.
As hot as the stock market was, I was more interested in trading commodities,
so that spring I begged the director of commodities at Merrill Lynch to give me a
summer job. He was surprised because people from places like Harvard Business
School weren’t typically interested in commodities, which were considered an
obscure stepchild of the Wall Street brokerage industry. Up until then, as far as I
know, no Harvard Business School student had ever worked in commodity
futures anywhere. Most Wall Street firms didn’t even have commodity futures
divisions, and Merrill Lynch’s was small, tucked away on a side street, and
furnished with basic metal desks.
A few months later, when I was back for my second year at HBS, the first oil
shock began, with prices quadrupling in a matter of months. The U.S. economy
slowed, commodity prices soared, and in 1973 the stock market took a dive.
Once again, I was blindsided—but in retrospect I could see that the dominoes
had fallen in a logical sequence.
In this case, the debt-financed overspending of the 1960s had continued into
the early 1970s. The Fed had funded this spending with easy-credit policies, but
by paying back its debts with depreciated paper money instead of gold-backed
dollars, the U.S. effectively defaulted. Naturally, with all this money printing the
dollar plunged in value. That allowed for more easy credit, which led to even
more spending. The inflationary surge that followed the breakdown of the
currency system sent commodity prices even higher. In response, in 1973, the
Fed tightened monetary policy, which is what central banks do when inflation
and growth are too strong. This in turn caused the worst decline in stocks and the
worst weakening of the economy since the Great Depression. The Nifty 50 were
particularly affected, plunging severely.
The lesson? When everybody thinks the same thing—such as what a sure bet
the Nifty 50 is—it is almost certainly reflected in the price, and betting on it is
probably going to be a mistake. I also learned that for every action (such as easy
money and credit) there is a consequence (in this case, higher inflation) roughly
proportionate to that action, which causes an approximately equal and opposite
reaction (tightening of money and credit) and market reversals.
I was beginning to see things happening over and over again, which led me to
see that most everything is “another one of those”: Most everything has
happened repeatedly before for logical cause-effect reasons. Of course, being
able to both properly identify which ones of those are happening and to
understand the cause-effect relationships behind them remained difficult.
Though most everything seemed inevitable and logical in retrospect, nothing
was nearly as clear in real time.
Because people chase what’s hot and avoid what’s not, stock investing fell
out of favor after 1973 and commodity trading became the thing to do. With my
background in commodities and my Harvard MBA, I became a sought-after
property. Dominick & Dominick, a middle-sized, hundred-year-old brokerage
firm, hired me as director of commodities for $25,000 a year, which was near the
top of what HBS graduate starting salaries were that year. My new boss paired
me with an older, experienced guy who had lots of commodities brokerage
experience, and we were assigned the task of setting up a commodities division.
I was in way over my head, though I was too arrogant to realize it at the time. I
probably would have learned a lot of painful lessons had the job continued, but
the bad stock market took Dominick & Dominick under before we’d made much
progress.
As the economy unraveled, the Watergate scandal dominated the headlines
and I saw again how politics and economics intertwine, usually with economics
leading. This downward spiral led people to become pessimistic, so they sold
their stocks and the market continued to fall. Things couldn’t have gotten much
worse but everyone was afraid they would. It was the mirror image of what I’d
witnessed in 1966 when the market hit its top, and just as it was then, the
consensus was wrong. When people are very pessimistic, they sell out, prices
typically get very cheap, and action to improve conditions has to be taken. Sure
enough, the Fed eased its monetary policy and stocks hit bottom in December
1974.
At the time, I was single and living in New York; I was having a great time
partying with friends from HBS and dating a lot. My roommate was dating a
Cuban woman and he set me up on a blind date with one of her friends, an exotic
woman from Spain named Barbara who could barely speak English. This wasn’t
a problem, because we communicated in different ways. She thrilled me for
nearly two years before we moved in together, got married, had four sons, and
shared an amazing life together. She still thrills me but is too private a person for
me to say more about her.
While I worked in the brokerage business, I also traded my own account.
Though I had many more winning positions than losing ones, I can only recall
the losing ones now. I remember one big one when I owned pork bellies. For
several days the market for them was limit down—meaning that the price had
fallen so low that trading had to be stopped. I later described the impact of this
experience to Jack Schwager, the author of Hedge Fund Market Wizards:
In those days, we had the big commodity boards, which clicked whenever
prices changed. So each morning, on the opening, I would see and hear the
market click down 200 points, the daily limit, stay unchanged at that price,
and know that I had lost that much more, with the amount of potential
additional losses still undefined. It was a very tactile experience . . . [and] it
taught me the importance of risk controls, because I never wanted to
experience that pain again. It enhanced my fear of being wrong and taught
me to make sure that no single bet, or even multiple bets, could cause me to
lose more than an acceptable amount. In trading you have to be defensive
and aggressive at the same time. If you are not aggressive, you are not going
to make money, and if you are not defensive, you are not going to keep
money. I believe that anyone who has made money in trading has had to
experience horrendous pain at some point. Trading is like working with
electricity; you can get an electric shock. With that pork belly trade and
other trades, I felt the electric shock and the fear that comes with it.
After Dominick & Dominick closed its retail business, I moved on to a
bigger, more successful brokerage firm. During my short stay there, it took over
numerous other firms and changed its name several times, eventually becoming
Shearson, though Sandy Weill stayed in charge through it all.
Shearson put me in charge of its futures hedging business, which included
both commodity futures and financial futures. I was the person helping clients
who had price risks in their businesses manage them by using futures. I
developed quite an expertise in the grain and livestock markets, which often led
me down to West Texas and the agricultural areas of California. The Shearson
brokers, cattle producers, and grain dealers I dealt with were great folks who
brought me into their worlds, taking me to honky-tonks, dove hunts, and
barbecues. We worked and had a blast together, and I built a second life with
them that lasted several years—though my job at Shearson lasted only a bit more
than a year.
Much as I loved the job and the people I worked with, I didn’t fit into the
Shearson organization. I was too wild. For example, as a joke that now seems
pretty stupid, I hired a stripper to drop her cloak while I was lecturing at a
whiteboard at the California Grain & Feed Association’s annual convention. I
also punched my boss in the face. Not surprisingly, I was fired.
But the brokers, their clients, and even the ones who fired me liked me and
wanted to keep getting my advice. Even better, they were willing to pay me for
it, so in 1975 I started Bridgewater Associates.
STARTING BRIDGEWATER
Actually, I restarted it. Just after I graduated from HBS and went to work in
commodities at Dominick & Dominick, I’d set up a little business with Bob
Scott, a friend from HBS. Along with a few pals in other countries, we made
halfhearted attempts to sell commodities from the U.S. to other countries. We
called it Bridgewater because we were “bridging the waters” and it had a good
ring to it. By 1975 there wasn’t much left of this commodities company, but as it
did already exist on paper, I used it.
I worked out of my two-bedroom apartment. When a pal from HBS who I
shared the apartment with moved out, I made his bedroom an office. I worked
with another friend I played rugby with, and we hired a great young woman who
worked as our assistant. That was Bridgewater.
I spent most of my time following the markets and putting myself in the shoes
of my corporate clients to show them how I would handle market risks if I were
them. And of course I continued to trade my own account. Pursuing a mission
with friends to help clients beat the markets was much more fun than having a
real job. As long as my basic living expenses were covered, I knew I’d be happy.
In 1977, Barbara and I decided to have a child, so we got married. We moved
into a rented brownstone in Manhattan and I moved the company there too. The
Russians were buying lots of grain at the time and wanted my advice, so I took
Barbara on a combined honeymoon–business trip to the USSR. We arrived in
Moscow on New Year’s Eve and rode by bus from the drab airport through a
dusting of snow, past St. Basil’s Cathedral to a big party with a lot of incredibly
friendly, fun-loving Russians.
My business has always been a way to get me into exotic places and allow me
to meet interesting people. If I make any money from those trips, that’s just icing
on the cake.
MODELING MARKETS AS MACHINES
I was really getting my head into the livestock, meat, grain, and oilseed markets.
I loved them because they were concrete and less subject than stocks to distorted
perceptions of value. While stocks could stay too high or too low because
“greater fools” kept buying or selling them, livestock ended up on the meat
counter where it would be priced based on what consumers were willing to pay.
I could visualize the processes that led to those sales and see the relationships
underlying them. Since livestock eat grain (mostly corn) and soymeal, and since
corn and soybeans compete for acreage, those markets are closely related. I
learned just about everything imaginable about them—what the planted acreage
and typical yields were in each of the major growing areas; how to convert
rainfall levels in different weeks of the growing season into yield estimates; how
to project harvest sizes, carrying costs, and livestock inventories by weight
group, location, and rates of weight gain; and how to project dressing yields,
retailer margins, consumer preferences by cut of meat, and the amounts to be
slaughtered in each season.
This wasn’t academic learning: People with practice in the business showed
me how the agricultural processes worked, and I organized what they told me
into models I used to map the interactions of those parts through time.
For example, by knowing how many cattle, chickens, and hogs were being
fed, how much grain they ate, and how fast they gained weight, I could project
both when and how much meat would come to market and when and how much
corn and soymeal would be consumed. Likewise, by seeing how much acreage
was planted with corn and soybeans in all the growing areas, doing regressions
that showed how rainfall affected the yields in each of these areas, and applying
weather forecasts and rainfall data, I could project the timing and quantity of
corn and soybean production. To me it all looked like a beautiful machine with
logical cause-effect relationships. By understanding these relationships, I could
come up with decision rules (or principles) I could model.
These early models were a far cry from the ones we use now; they were backof-the-envelope sketches, analyzed and converted into computer programs with
the technology I could afford at the time. At the very beginning, I did regressions
on my handheld Hewlett-Packard HP-67 calculator, plotted charts by hand with
colored pencils, and recorded every trade in composition notebooks. When the
personal computer came along, I could input the numbers and watch them be
converted into pictures of what would happen on spreadsheets. Knowing how
cattle, hogs, and chickens progressed through their stages of production, how
they competed for meat-eater dollars, what meat-eaters would spend and why,
and how the profit margins of meatpackers and retailers would influence their
behaviors (for example, which cuts of meat they would push in advertisements),
I could see how the machine produced cattle, hog, and chicken prices that I
could bet on.
As basic as those early models were, I loved building and refining them—and
they were good enough to make me money. The approach to price determination
I was using was different from the one I had learned in my economics classes
where supply and demand were both measured in terms of quantities sold. I
found it much more practical to measure demand as the amount spent (instead of
as the quantity bought) and to look at who the buyers and sellers were and why
they bought and sold. I will explain this approach in Economic and Investment
Principles.
This different approach was one of the key reasons I caught economic and
market moves others missed. From that point on, whenever I looked at any
market—commodities, stocks, bonds, currencies, whatever—I could see and
understand imbalances that others who defined supply and demand in the
traditional way (as units that equaled each other) missed.
Visualizing complex systems as machines, figuring out the cause-effect
relationships within them, writing down the principles for dealing with them,
and feeding them into a computer so the computer could “make decisions” for
me all became standard practices.
Don’t get me wrong. My approach was far from perfect. I vividly remember
one “can’t lose” bet that personally cost me about $100,000. That was most of
my net worth at the time. More painful still, it hurt my clients too. The most
painful lesson that was repeatedly hammered home is that you can never be sure
of anything: There are always risks out there that can hurt you badly, even in the
seemingly safest bets, so it’s always best to assume you’re missing something.
This lesson changed my approach to decision making in ways that will
reverberate throughout this book—and to which I attribute much of my success.
But I would make many other mistakes before I fully changed my behavior.
BUILDING THE BUSINESS
While making money was good, having meaningful work and meaningful
relationships was far better. To me, meaningful work is being on a mission I
become engrossed in, and meaningful relationships are those I have with people
I care deeply about and who care deeply about me.
Think about it: It’s senseless to have making money as your goal as money
has no intrinsic value—its value comes from what it can buy, and it can’t buy
everything. It’s smarter to start with what you really want, which are your real
goals, and then work back to what you need to attain them. Money will be one of
the things you need, but it’s not the only one and certainly not the most
important one once you get past having the amount you need to get what you
really want.
When thinking about the things you really want, it pays to think of their
relative values so you weigh them properly. In my case, I wanted meaningful
work and meaningful relationships equally, and I valued money less—as long as
I had enough to take care of my basic needs. In thinking about the relative
importance of great relationships and money, it was clear that relationships were
more important because there is no amount of money I would take in exchange
for a meaningful relationship, because there is nothing I could buy with that
money that would be more valuable. So, for me, meaningful work and
meaningful relationships were and still are my primary goals and everything I
did was for them. Making money was an incidental consequence of that.
In the late 1970s, I began sending my observations about the markets to
clients via telex. The genesis of these Daily Observations (“Grains and
Oilseeds,” “Livestock and Meats,” “Economy and Financial Markets”) was
pretty simple: While our primary business was in managing risk exposures, our
clients also called to pick my brain about the markets. Taking those calls became
time-consuming, so I decided it would be more efficient to write down my
thoughts every day so others could understand my logic and help improve it. It
was a good discipline since it forced me to research and reflect every day. It also
became a key channel of communication for our business. Today, almost forty
years and ten thousand publications later, our Daily Observations are read,
reflected on, and argued about by clients and policymakers around the world.
I’m still writing them, along with others at Bridgewater, and expect to continue
to write them until people don’t care to read them or I die.
In addition to providing clients with these observations and advice, I began to
manage their exposures by buying and selling on their behalf. Sometimes I was
paid a fixed fee each month and sometimes I received a percentage of the profits.
Among my consulting clients during this period was McDonald’s, which was a
huge beef buyer, and Lane Processing, then the largest chicken producer in the
country. I made them both a lot of money—especially Lane Processing, which
did even better from its speculations in the grain and soy markets than it did
from raising and selling chickens.
Around this time, McDonald’s had conceived of a new product, the Chicken
McNugget, but they were reluctant to bring it to market because of their concern
that chicken prices might rise and squeeze their profit margins. Chicken
producers like Lane wouldn’t agree to sell to them at a fixed price because they
were worried that their costs would go up and they would be squeezed.
As I thought about the problem, it occurred to me that in economic terms a
chicken can be seen as a simple machine consisting of a chick plus its feed. The
most volatile cost that the chicken producer needed to worry about was feed
prices. I showed Lane how to use a mix of corn and soymeal futures to lock in
costs so they could quote a fixed price to McDonald’s. Having greatly reduced
its price risk, McDonald’s introduced the McNugget in 1983. I felt great about
helping make that happen.
I identified similar types of price relationships in the cattle and meat markets.
For example, I showed cattle feeders how they could lock in strong profit
margins by hedging good price relationships between their cost items (feeder
cattle, corn, and soymeal) and what they were going to sell (fed cattle) six
months later. I developed a way of selling different cuts of fresh meat for future
delivery at fixed prices far below frozen meat prices but that still produced big
profit margins. Combining my clients’ deep understanding of the way the
“machines” of their own businesses operated with my knowledge of the way
markets functioned worked to our mutual advantage, while making the markets
more efficient overall. My ability to visualize these complex machines gave us a
competitive edge against those who were shooting from the hip, and eventually
changed the way these industries operated. And, as always, it was a kick to be
working with people I liked.
On March 26, 1978, my wife gave birth to our first son, Devon. To have a
child was the most difficult decision I ever made, because I couldn’t know what
the experience would be like and it would be irrevocable. It turned out to be my
best decision. While I won’t delve too much into my family life in this book, I
pursued it with the same sort of intensity with which I pursued my career, and I
linked them. To give you an idea about how interwoven they were in my mind,
Devon was named after one of the oldest breeds of cattle known to man, among
the first breeds imported into the U.S. and renowned for its high fertility.
2 His inability to meet his obligations, especially his margin calls at brokerage houses, could have led to
cascading defaults.
CHAPTER 3
MY ABYSS:
1979–1982
From 1950 until 1980, debt, inflation, and growth moved up and down together
in steadily larger waves, with each bigger than the one before, especially after
the dollar’s link to gold was broken in 1971. In the 1970s, there were three such
waves. The first came in 1971, as a result of the dollar’s devaluation. The
second, which came between 1974 and 1975, took inflation to its highest level
since World War II. The Fed tightened the money supply, driving interest rates
to record highs, which caused the worst stock market and economic downturn
since the 1930s. The third and largest wave came in 1979–82 and was one of the
greatest economic/market crescendos and reversals since 1929–32. Interest rates
and inflation soared and crashed; stocks, bonds, commodities, and currencies
went through one of their most volatile periods ever; and unemployment hit its
highest level since the Great Depression. It was a time of extreme turbulence for
the global economy, for the markets, and for me personally.
In 1978–80 (as in 1970–71 and in 1974–75) different markets began to move
in unison because they were more influenced by swings in money and credit
growth than by changes in their individual supply-demand balances. These big
moves were exacerbated by the oil shock that followed the fall of the Shah of
Iran. That oil market volatility led to the creation of the first oil futures contract,
which gave me trading opportunities (by then, there were futures markets in
interest rates and currencies as well, and I was making bets in all of them).
Because all markets were being driven by these factors, I immersed myself in
macroeconomics and historical data (especially interest rates and currency data)
to improve my understanding of the machine at play. As inflation began to rise
in 1978, I realized the Fed would likely act to tighten the monetary supply. By
July 1979, inflation was clearly out of control, and President Jimmy Carter
appointed Paul Volcker chairman of the Federal Reserve. A few months later,
Volcker announced that the Fed would limit the growth of the money supply to
5.5 percent. According to my calculations at the time, 5.5 percent money growth
would break the inflation spiral—but it would also strangle the economy and
markets and likely cause a catastrophic debt crisis.
A SILVER ROLLER COASTER
Just before Thanksgiving, I met with Bunker Hunt, then the richest man in the
world, at the Petroleum Club in Dallas. Bud Dillard, a Texan friend and client of
mine who was big in the oil and cattle businesses, had introduced us a couple of
years before, and we regularly talked about the economy and markets, especially
inflation. Just a few weeks before our meeting, Iranian militants had stormed the
U.S. embassy in Tehran, taking fifty-two Americans hostage. There were long
lines to buy gas and extreme market volatility. There was clearly a sense of
crisis: The nation was confused, frustrated, and angry.
Bunker saw the debt crisis and inflation risks pretty much as I saw them. He’d
been wanting to get his wealth out of paper money for the past few years, so
he’d been buying commodities, especially silver, which he had started
purchasing for about $1.29 per ounce, as a hedge against inflation. He kept
buying and buying as inflation and the price of silver went up, until he had
essentially cornered the silver market. At that point, silver was trading at around
$10. I told him I thought it might be a good time to get out because the Fed was
becoming tight enough to raise short-term interest rates above long-term rates
(which was called “inverting the yield curve”). Every time that happened,
inflation-hedged assets and the economy went down. But Bunker was in the oil
business, and the Middle East oil producers he talked to were still worried about
the depreciation of the dollar. They had told him they were also going to buy
silver as a hedge against inflation so he held on to it in the expectation that its
price would continue to rise. I got out.
On December 8, 1979, Barbara and I had our second son, Paul. Everything
was changing very fast, but I loved the intensity of it all.
By early 1980, silver had gone to nearly $50, and as rich as he was, Bunker
became a lot richer. While I had made a lot of money on silver’s rise to $10, I
was kicking myself for missing the ride to $50. But at least, by being out, I
didn’t lose money. There are anxious times in every investor’s career when your
expectations of what should be happening aren’t aligned with what is happening
and you don’t know if you’re looking at great opportunities or catastrophic
mistakes. Because I had a strong tendency to be right but early, I was inclined to
think that was the case. It was, but to have missed the $40 move up was
inexcusable to me.
When the plunge finally did happen, in March 1980, silver crashed back
down below $11. It ruined Hunt, and he nearly brought down the whole U.S.
economy as he fell.2 The Fed had to intervene to control the ripple effects. All of
this pounded an indelible lesson into my head: Timing is everything. I was
relieved that I was out of that market, but watching the richest man in the world
—who was also someone I empathized with—go broke was jarring. Yet it was
nothing compared to what was to come.
EXPANDING THE TEAM
Later that same year, a great guy named Paul Colman joined Bridgewater. We
had become good friends from our dealings in the cattle and beef industry, and I
respected his intellect and values, so I convinced him we should conquer that
world together. He brought his wonderful wife and kids up from Guymon,
Oklahoma, and our families became inseparable. We ran the business in a
scrappy, seat-of-the-pants way. Because the office part of the brownstone where
I lived and worked was generally such a mess—with chicken bones or other
scraps from working through the previous night’s dinner littering my desk—we
held all our client meetings at the Harvard Club. Paul would hide a clean blue
oxford shirt and tie amid the mess so I’d have something to wear. In 1981, we
decided we wanted to raise our families in more of a country setting, so we all
moved up to Wilton, Connecticut, to run Bridgewater from there.
Colman and I worked by challenging each other’s ideas and trying to find the
best answers; it was a constant back-and-forth, which we both enjoyed,
especially at a time when there was so much to figure out. We would debate
about the markets and the forces behind them late into the night, plug data into
the computer before we went to bed, and see what it spit out in the morning.
MY BIG DEPRESSION CALL
The economy was in even worse shape in 1979–81 than it was during the
financial crisis of 2007–08 and the markets were more volatile. In fact, some
would say this was the most volatile period ever. The charts opposite going back
to 1940 show the volatility of interest rates and gold.
As you can see, there had been nothing like it prior to 1979–82. It was one of
the most pivotal times in the last hundred years. The political pendulum
throughout the world swung to the right, bringing Margaret Thatcher, Ronald
Reagan, and Helmut Kohl to power. “Liberal” had ceased to mean being in favor
of progress and had come to mean “paying people not to work.”
As I saw it, the Fed was stuck between a rock and a hard place. They either
had to a) print money to relieve debt problems and keep the economy going
(which had already pushed inflation to 10 percent in 1981 and was causing
people to dump bonds and buy inflation-hedged assets), or b) break the back of
inflation by becoming bone-crushingly tight (which would break the back of
debtors because debt was at the highest levels since the Great Depression). The
worsening problem showed up in both progressively higher levels of inflation
and progressively worse levels of economic activity. Both appeared to be
coming to a head. Debts continued to rise much faster than the incomes
borrowers needed to repay them, and American banks were lending huge
amounts—much more than they had in capital—to emerging countries. In March
1981, I wrote a Daily Observation entitled “The Next Depression in Perspective”
and concluded it by saying, “The enormity of our debt implies that the
depression will be as bad or worse than that witnessed in the thirties.”
This view was extremely controversial. To most people, “depression” was a
scary word used by kooky and sensationalist people, not something thoughtful
people took seriously. But I had studied debt and depressions back to 1800, done
my calculations, and was confident that the debt crisis led by emerging countries
was coming. I had to share my thinking with my clients. Because my views were
so controversial I asked others to track my reasoning and point out to me where
it was bad. No one could find any flaws in my logic, though they were all
reluctant to endorse my conclusion.
Because I believed that the choice was between accelerating inflation and
deflationary depression, I was holding both gold (which performs well in
accelerating inflation) and bonds (which perform well in deflationary
depressions). Up until that point, gold and bonds had moved in opposite
directions, depending on whether inflation expectations rose or fell. Holding
those positions seemed much safer than holding alternatives like cash, which
would lose value in an inflation environment, or stocks, which would crash in a
depression.
At first, the markets went against me. But my experience with silver and other
trades had taught me that I had a chronic problem with timing, so I believed I
was just early and what I was expecting would happen soon. That didn’t take
long to happen. By the fall of 1981, the tight Fed policies were having a
devastating effect, my bond bets were beginning to pay off, and my kooky views
were starting to look right on. In February 1982, the Fed temporarily added
liquidity to avoid a cash crunch. In June, as the scramble for liquidity intensified,
the Fed responded by printing money, increasing liquidity to its highest level
since Paul Volcker’s appointment. But it still wasn’t enough.
THE GREATEST WHIPSAW EVER
In August 1982, Mexico defaulted on its debt. By then, it was clear to most
everyone that a number of other countries were about to follow. This was a huge
deal, because U.S. banks had lent about 250 percent of their capital to other
countries just as at risk as Mexico. Business loan activity in the U.S. ground to a
halt.
Because I was one of the few people who had seen these things coming, I
started to get a lot of attention. Congress was holding hearings on the crisis and
invited me to testify; in November I was the featured guest on Wall $treet Week
with Louis Rukeyser, the must-watch show for anyone in the markets. In both
appearances, I confidently declared that we were headed for depression and
explained why.
After Mexico’s default, the Fed responded to the economic collapse and debt
defaults by making money more readily available. This caused the stock market
to jump by a record amount. While that surprised me, I interpreted it as a kneejerk reaction to the Fed’s move. After all, in 1929 a 15 percent rally was
followed by the greatest crash of all time. In October, I laid out my prognosis in
a memo. As I saw it, there was a 75 percent chance the Fed’s efforts would fall
short and the economy would move into failure; a 20 percent chance it would
initially succeed at stimulating the economy but still ultimately fail; and a 5
percent chance it would provide enough stimulus to save the economy but
trigger hyperinflation. To hedge against the worst possibilities, I bought gold and
T-bill futures as a spread against eurodollars, which was a limited-risk way of
betting on credit problems increasing.
I was dead wrong. After a delay, the economy responded to the Fed’s efforts,
rebounding in a noninflationary way. In other words, inflation fell while growth
accelerated. The stock market began a big bull run, and over the next eighteen
years the U.S. economy enjoyed the greatest noninflationary growth period in its
history.
How was that possible? Eventually, I figured it out. As money poured out of
these borrower countries and into the U.S., it changed everything. It drove the
dollar up, which produced deflationary pressures in the U.S., which allowed the
Fed to ease interest rates without raising inflation. This fueled a boom. The
banks were protected both because the Federal Reserve loaned them cash and the
creditors’ committees and international financial restructuring organizations
such as the International Monetary Fund (IMF) and the Bank for International
Settlements arranged things so that the debtor nations could pay their debt
service from new loans. That way everyone could pretend everything was fine
and write down those loans over many years.
My experience over this period was like a series of blows to the head with a
baseball bat. Being so wrong—and especially so publicly wrong—was
incredibly humbling and cost me just about everything I had built at
Bridgewater. I saw that I had been an arrogant jerk who was totally confident in
a totally incorrect view.
So there I was after eight years in business, with nothing to show for it.
Though I’d been right much more than I’d been wrong, I was all the way back to
square one.
At one point, I’d lost so much money I couldn’t afford to pay the people who
worked with me. One by one, I had to let them go. We went down to two
employees—Colman and me. Then Colman had to go. With tears from all, his
family packed up and returned to Oklahoma. Bridgewater was now down to just
one employee: me.
Losing people I cared so much about and very nearly losing my dream of
working for myself was devastating. To make ends meet, I even had to borrow
$4,000 from my dad until we could sell our second car. I had come to a fork in
the road: Should I put on a tie and take a job on Wall Street? That was not the
life I wanted. On the other hand, I had a wife and two young children to support.
I realized I was facing one of life’s big turning points and my choices would
have big implications for me and for my family’s future.
FINDING A WAY PAST MY INTRACTABLE
INVESTMENT PROBLEM
Making money in the markets is tough. The brilliant trader and investor Bernard
Baruch put it well when he said, “If you are ready to give up everything else and
study the whole history and background of the market and all principal
companies whose stocks are on the board as carefully as a medical student
studies anatomy—if you can do all that and in addition you have the cool nerves
of a gambler, the sixth sense of a clairvoyant and the courage of a lion, you have
a ghost of a chance.”
In retrospect, the mistakes that led to my crash seemed embarrassingly
obvious. First, I had been wildly overconfident and had let my emotions get the
better of me. I learned (again) that no matter how much I knew and how hard I
worked, I could never be certain enough to proclaim things like what I’d said on
Wall $treet Week: “There’ll be no soft landing. I can say that with absolute
certainty, because I know how markets work.” I am still shocked and
embarrassed by how arrogant I was.
Second, I again saw the value of studying history. What had happened, after
all, was “another one of those.” I should have realized that debts denominated in
one’s own currency can be successfully restructured with the government’s help,
and that when central banks simultaneously provide stimulus (as they did in
March 1932, at the low point of the Great Depression, and as they did again in
1982), inflation and deflation can be balanced against each other. As in 1971, I
had failed to recognize the lessons of history. Realizing that led me to try to
make sense of all movements in all major economies and markets going back a
hundred years and to come up with carefully tested decision-making principles
that are timeless and universal.
Third, I was reminded of how difficult it is to time markets. My long-term
estimates of equilibrium levels were not reliable enough to bet on; too many
things could happen between the time I placed my bets and the time (if ever) that
my estimates were reached.
Staring at these failings, I realized that if I was going to move forward
without a high likelihood of getting whacked again, I would have to look at
myself objectively and change—starting by learning a better way of handling the
natural aggressiveness I’ve always shown in going after what I wanted.
Imagine that in order to have a great life you have to cross a dangerous
jungle. You can stay safe where you are and have an ordinary life, or you can
risk crossing the jungle to have a terrific life. How would you approach that
choice? Take a moment to think about it because it is the sort of choice that, in
one form or another, we all have to make.
Even after my crash, I knew I had to go after the terrific life with all its risks,
so the question was how to “cross the dangerous jungle” without getting killed.
In retrospect, my crash was one of the best things that ever happened to me
because it gave me the humility I needed to balance my aggressiveness. I learned
a great fear of being wrong that shifted my mind-set from thinking “I’m right” to
asking myself “How do I know I’m right?” And I saw clearly that the best way
to answer this question is by finding other independent thinkers who are on the
same mission as me and who see things differently from me. By engaging them
in thoughtful disagreement, I’d be able to understand their reasoning and have
them stress-test mine. That way, we can all raise our probability of being right.
In other words, I just want to be right—I don’t care if the right answer comes
from me. So I learned to be radically open-minded to allow others to point out
what I might be missing. I saw that the only way I could succeed would be to:
1. Seek out the smartest people who disagreed with me so I could try to
understand their reasoning.
2. Know when not to have an opinion.
3. Develop, test, and systemize timeless and universal principles.
4. Balance risks in ways that keep the big upside while reducing the downside.
Doing these things significantly improved my returns relative to my risks, and
the same principles apply in other aspects of life. Most importantly, this
experience led me to build Bridgewater as an idea meritocracy—not an
autocracy in which I lead and others follow, and not a democracy in which
everyone’s vote is equal—but a meritocracy that encourages thoughtful
disagreements and explores and weighs people’s opinions in proportion to their
merits.
Bringing these opposing opinions into the open and exploring them taught me
a lot about how people think. I came to see that people’s greatest weaknesses are
the flip sides of their greatest strengths. For example, some people are prone to
take on too much risk while others are too risk averse; some are too focused on
the details while others are too big-picture. Most are too much one way and not
enough another. Typically, by doing what comes naturally to us, we fail to
account for our weaknesses, which leads us to crash. What happens after we
crash is most important. Successful people change in ways that allow them to
continue to take advantage of their strengths while compensating for their
weaknesses and unsuccessful people don’t. Later in the book I will describe
specific strategies for change, but the important thing to note here is that
beneficial change begins when you can acknowledge and even embrace your
weaknesses.
Over the years that followed, I found that most of the extraordinarily
successful people I’ve met had similar big painful failures that taught them the
lessons that ultimately helped them succeed. Looking back on getting fired from
Apple in 1985, Steve Jobs said, “It was awful-tasting medicine, but I guess the
patient needed it. Sometimes life hits you in the head with a brick. Don’t lose
faith. I’m convinced that the only thing that kept me going was that I loved what
I did.”
I saw that to do exceptionally well you have to push your limits and that, if
you push your limits, you will crash and it will hurt a lot. You will think you
have failed—but that won’t be true unless you give up. Believe it or not, your
pain will fade and you will have many other opportunities ahead of you, though
you might not see them at the time. The most important thing you can do is to
gather the lessons these failures provide and gain humility and radical openmindedness in order to increase your chances of success. Then you press on.
My final lesson was perhaps the most important one, because it has applied
again and again throughout my life. At first, it seemed to me that I faced an allor-nothing choice: I could either take on a lot of risk in pursuit of high returns
(and occasionally find myself ruined) or I could lower my risk and settle for
lower returns. But I needed to have both low risk and high returns, and by setting
out on a mission to discover how I could, I learned to go slowly when faced with
the choice between two things that you need that are seemingly at odds. That
way you can figure out how to have as much of both as possible. There is almost
always a good path that you just haven’t discovered yet, so look for it until you
find it rather than settle for the choice that is then apparent to you.
As difficult as this was, I eventually found a way to have my cake and eat it
too. I call it the “Holy Grail of Investing,” and it’s the secret behind
Bridgewater’s success.
CHAPTER 4
MY ROAD OF TRIALS:
1983–1994
Coming out of my crash, I was so broke I couldn’t muster enough money to pay
for an airplane ticket to Texas to visit a prospective client, even though the fees
I’d earn were many times the cost of the fare—so I didn’t make that trip. Still, I
gradually added clients, revenue, and a new team. With time, my upswings
increased in magnitude and my downswings were both tolerable and
educational. I never thought of what I was doing as building (or rebuilding) a
company; I was just getting the things I needed to play my game.
Computers were among the most valuable things I acquired, because of how
they helped me think. Without them, Bridgewater would not have been nearly as
successful as it turned out to be.
The first microcomputers (what would later be known as personal computers)
had come on the market during the late 1970s, and I had been using them as
econometricians did, applying statistics and computing power to economic data
to analyze the workings of the economic machine. As I wrote in a December
1981 article, I believed (and still believe) that “theoretically . . . if there was a
computer that could hold all of the world’s facts and if it was perfectly
programmed to mathematically express all of the relationships between all of the
world’s parts, the future could be perfectly foretold.”
But I was a long way from doing that. Though my early systems provided
valuable insights into where prices would eventually reach equilibrium, they
hadn’t helped me develop robust trading strategies; they just showed me that a
particular bet would eventually pay off. For example, I’d run through my
analysis and end up with a view that the price of some commodity should be,
say, 75 cents or so. If it was currently 60 cents, I’d know I wanted to buy it, but I
wouldn’t be able to predict that the price would drop to 50 cents before climbing
back to 75, and I wouldn’t know when to buy and sell. Rarely, but still too often,
the system would be dead wrong and I would lose a lot.
“He who lives by the crystal ball is destined to eat ground glass” is a saying I
quoted a lot in those days. Between 1979 and 1982, I had eaten enough glass to
realize that what was most important wasn’t knowing the future—it was
knowing how to react appropriately to the information available at each point in
time. In order to do that, I would have to have a vast store of economic and
market data to draw on—and as it happened, I did.
From very early on, whenever I took a position in the markets, I wrote down
the criteria I used to make my decision. Then, when I closed out a trade, I could
reflect on how well these criteria had worked. It occurred to me that if I wrote
those criteria into formulas (now more fashionably called algorithms) and then
ran historical data through them, I could test how well my rules would have
worked in the past. Here’s how it worked in practice: I would start out with my
intuitions as I always did, but I would express them logically, as decisionmaking criteria, and capture them in a systematic way, creating a mental map of
what I would do in each particular situation. Then I would run historical data
through the systems to see how my decision would have performed in the past
and, depending upon the results, modify the decision rules appropriately.
We tested the systems going as far back as we could, typically more than a
century, in every country for which we had data, which gave me great
perspective on how the economic/market machine worked through time and how
to bet on it. Doing this helped educate me and led me to refine my criteria so
they were timeless and universal. Once I vetted those relationships, I could run
data through the systems as it flowed at us in real time and the computer could
work just as my brain worked in processing it and making decisions.
The result was Bridgewater’s original interest rate, stock, currencies, and
precious metals systems, which we then combined into one system for managing
our portfolio of bets. Our system was like an EKG on the economy’s vital signs;
as they changed, we changed our positions. However, rather than blindly
following the computer’s recommendations, I would have the computer work in
parallel with my own analysis and then compare the two. When the computer’s
decision was different from mine, I would examine why. Most of the time, it was
because I had overlooked something. In those cases, the computer taught me.
But sometimes I would think about some new criteria my system would’ve
missed, so I would then teach the computer. We helped each other. It didn’t take
long before the computer, with its tremendous processing power, was much
more effective than me. This was great, because it was like having a chess
grandmaster helping me plot my moves, except this player operated according to
a set of criteria that I understood and believed were logical, so there was no
reason for us to ever fundamentally disagree.
The computer was much better than my brain in “thinking” about many
things at once, and it could do it more precisely, more rapidly, and less
emotionally. And, because it had such a great memory, it could do a better job of
compounding my knowledge and the knowledge of the people I worked with as
Bridgewater grew. Rather than argue about our conclusions, my partners and I
would argue about our different decision-making criteria. Then we resolved our
disagreements by testing the criteria objectively. The rapidly expanding power
of computers during that era was like a constant stream of gifts from the gods to
us. I remember when RadioShack came out with an inexpensive handheld chess
computer; we sent one to each of our clients with the message, “A Systemized
Approach from Bridgewater.” That little computer chess game could kick my ass
on level two out of its nine levels. It was fun to put it up against each of my
clients so they could see how hard it was to beat computerized decision making.
Of course, we always had the freedom to override the system, which we did
less than 2 percent of the time—mostly to take money off the table during
extraordinary events that weren’t programmed, like the World Trade Center
going down on 9/11. While the computer was much better than our brains in
many ways, it didn’t have the imagination, understanding, and logic that we did.
That’s why our brains working with the computer made such a great partnership.
These decision-making systems were much better than the forecasting
systems I’d been using before, mostly because they incorporated our ongoing
reactions to developments, allowing us to deal with a wider range of
possibilities. They could also include timing rules. In a January 1987 piece
called “Making Money vs. Making Forecasts,” I explained that:
Truth be known, forecasts aren’t worth very much, and most people who
make them don’t make money in the markets. . . . This is because nothing is
certain and when one overlays the probabilities of all of the various things
that affect the future in order to make a forecast, one gets a wide array of
possibilities with varying probabilities, not one highly probable outcome. . . .
We believe that market movements reflect economic movements. Economic
movements are reflected in economic statistics. By studying the relationships
between economic statistics and market movements, we’ve developed precise
rules for identifying important shifts in the economic/market environment
and in turn our positions. In other words, rather than forecasting changes in
the economic environment and shifting positions in anticipation of them, we
pick up these changes as they’re occurring and move our money around to
keep in those markets which perform best in that environment.
Over the last three decades of building these systems we have incorporated
many more types of rules that direct every aspect of our trading. Now, as realtime data is released, our computers parse information from over 100 million
datasets and give detailed instructions to other computers in ways that make
logical sense to me. If I didn’t have these systems, I’d probably be broke or dead
from the stress of trying so hard. We certainly wouldn’t have done as well in the
markets as we have. As you will see later, I am now developing similar systems
to help us make management decisions. I believe one of the most valuable things
you can do to improve your decision making is to think through your principles
for making decisions, write them out in both words and computer algorithms,
back-test them if possible, and use them on a real-time basis to run in parallel
with your brain’s decision making.
But I’m getting ahead of myself. Let’s go back to 1983.
RESURRECTING BRIDGEWATER
By late 1983, Bridgewater had six employees. Up until then, I hadn’t done any
marketing; the business we got came from word of mouth and from people
reading my daily telexes and seeing my public appearances. But clearly there
was a growing demand for our research, and I realized we could sell it to
supplement our consulting and trading income. So I hired a seventh employee, a
former door-to-door Bible salesman named Rob Fried, and we hit the road,
lugging around a projector and a huge stack of slides, hawking a $3,000-permonth research package with my daily telexes, weekly conference calls,
biweekly and quarterly research reports, and quarterly meetings. Over the next
year, Rob brought in a number of institutions and institutional investment
managers, including General Electric, Keystone Custodian Funds, the World
Bank, Brandywine, Loomis Sayles, Provident Capital Management, the Singer
Company, Loews Corporation, GTE Corporation, and Wellington Management.
At that point, our business consisted of three main areas: consulting for fees,
managing companies’ risks for incentive fees, and selling the research packages.
We worked with all sorts of corporate, financial, and government institutions
that had market exposures—banks, diversified international businesses,
commodities producers, food producers, public utilities, and more. For example,
we would build a plan to help a multinational company deal with the currency
exposure it faced from operating in different countries.
My approach was to immerse myself in a business until I got to a point where
I felt that the strategies I was handing off were the ones I would use were I
running the company myself. I would break each company down into distinct
logical components and then come up with a plan for managing each part, using
a variety of financial tools, especially derivative instruments. The most
important components to separate were the profits coming from the core
business and those that were speculative profits and losses coming from price
changes. We would do this to show them what a “risk-neutral” position would
look like, which is to say, the properly hedged position one would take if one
didn’t have a view of the markets. I would advise them to deviate from this
position only when they wanted to speculate, which they should only do in
measured ways and with full knowledge of the effects it could have on their core
business. This approach was eye-opening for most of the firms we worked with.
It gave them clarity and control, and yielded them better results. Sometimes they
wanted us to speculate for them, which we would do for a share of the profits.
This approach to establishing a “risk-neutral” benchmark position and
deviating from it with measured bets was the genesis of the style of investment
management we would later call “alpha overlay,” in which passive (“beta”) and
active (“alpha”) exposures are separated. The return of a market (such as the
stock market) itself is called its beta. Alpha is the return that comes from betting
against others. For example, some people outperform the stock market and
others underperform it; they are said to have positive or negative alpha. With
alpha overlay, we were offering a way of making bets independent of underlying
market performance. Approaching the market in this way taught me that one of
the keys to being a successful investor is to only take bets you are highly
confident in and to diversify them well.
One of our clients in the mid-1980s was Alan Bond, an audacious
entrepreneur who was one of the richest people in Australia. A self-made man,
he was famous for being the first non-American to win the America’s Cup yacht
race in its then 132-year history. Like Bunker Hunt, he eventually bet badly and
was forced to declare bankruptcy. I advised him and his team on their way up
and stayed on through his downfall, so I watched the tragedy unfold from up
close. His was a classic case of confusing business with speculation and only
hedging when it was too late.
Bond borrowed U.S. dollars to buy assets like breweries in Australia. He did
that because U.S. interest rates were lower than they were in Australia. Though
he didn’t realize it, he was speculating that the U.S. dollar, in which he would
have to pay back his loans, would not rise. When the U.S. dollar did rise against
the Australian dollar in the mid-1980s and his Australian-dollar beer-sales
earnings weren’t enough to pay his debts, his team called me for advice. I
calculated what Bond Corp’s position would be if they hedged on currencies and
saw that doing so would lock in losses that would ruin them, so I advised them
to wait. When the Australian dollar rallied, I advised them to put the hedges in
place, but they didn’t because they believed the currency problem had gone
away. Before long, the Australian dollar plunged to new lows and they called me
in for an emergency meeting. There wasn’t much they could do without locking
in ruinous losses, so they again did nothing, and this time the Australian dollar
didn’t rally. Seeing one of the richest and most accomplished men on the planet
lose everything made a huge impression on me.
We also did one-off consulting projects related to the markets. In 1985, I
worked with Paul Tudor Jones, a good friend and a great trader, to design a U.S.
dollar futures contract (a tradable index tracking the price of the U.S. dollar
against a basket of foreign currencies) that traded (and still trades) on the New
York Cotton Exchange. I also worked with the New York Futures Exchange to
help design and market their CRB futures contract (a tradable index that tracks
the price of a basket of commodities).
Unlike most people who work in the markets, I never had any desire to build
investment products, especially conventional ones, just because they would sell
well. All I wanted was to trade the markets and build relationships, doing for our
clients exactly what I would do if I were in their shoes. But I also loved building
brand-new things, especially if they were great and revolutionary. By the mid1980s, a couple of things were clear to me: First, we were making good calls in
the interest-rate and currency markets, and the institutional investment managers
who were buying our research were using it to make money. Second, we were
successfully managing companies’ interest-rate and currency exposures. With
those two things going as well as they were, I figured we could become
successful institutional investment managers ourselves. So I made the pitch to
the people who ran the World Bank’s pension fund, most importantly Hilda
Ochoa, who was its chief investment officer at the time. Despite the fact that we
had no assets under management and no track record, she gave us a $5 million
U.S. bond account to manage.
That was a huge turning point for us, as it was the start of Bridgewater as we
know it today. The strategy we used for the World Bank shifted between holding
cash and holding twenty-year U.S. Treasury bonds, because these positions
would give us leveraged bets on the direction of interest rates. When our systems
indicated that the pressures on interest rates would cause them to fall, we would
hold twenty-year Treasury bonds, and when the system pointed to rates rising,
we would stay in cash. We did very well, and before long other large
institutional investors gave us money to manage as well. Mobil Oil and Singer
were our next two accounts and others followed in rapid succession. We went on
to become the top-performing U.S. bond manager in the world.
VENTURING BEHIND THE “CLOSED DOOR” OF
CHINA
Part of what was great about consulting was that it gave me opportunities to
travel. The more unusual a place, the more interesting I found it. This curiosity
drew me to Beijing in 1984. The only images I’d seen of China when I was
growing up were of masses of people waving Mao’s Little Red Book, so having
an opportunity to go behind what was still a mostly “closed door” was alluring. I
got the invitation because I had a small office in Hong Kong whose director was
an advisor to CITIC, the “window company” that was the only business in China
allowed to deal with the outside world. Beijing was filled with wonderful and
incredibly hospitable people who introduced us to the tradition of drinking shots
of Moutai while shouting Ganbei! (Bottoms up!) and generally showed us a
great time. This first trip, which I made with my wife and a few other people,
began an incredibly rewarding thirty-plus-year journey that has had a profound
impact on my family and me.
There were no financial markets in China at the time; eventually a small
group put together by seven Chinese companies (including CITIC) known as the
Securities Executive Education Council began to develop them. They started in
1989, just before the Tiananmen Square incident, which set them back because
such market developments were still seen as too capitalist. They operated out of
a small hotel room and hardly had any financing. I can still picture the big
garbage bin under the metal stairway going up to their office. I really respected
the risks these young people were taking by doing this at such an unsettled time,
so I made a small donation to give them a hand and was excited to share my
knowledge with them. From nothing, these people built China’s markets and the
government’s securities regulatory arm.
In 1994, I set up a company called Bridgewater China Partners. By then, I
was convinced that China was poised to become the greatest economy in the
world in the twenty-first century, but hardly anyone was investing in China yet;
good deals could still be struck. I could bring money to the table by introducing
my institutional investment clients to opportunities, and I could provide knowhow by introducing Chinese companies to American ones. In exchange, we
would get a stake in these companies. Essentially, I was setting up the first U.S.-
based private equity firm in China.
I launched the company by bringing a small group of institutional investor
clients, who together managed $70 billion in assets, to China for a visit. When
we got back, we agreed to move forward by setting up a jointly owned merchant
bank in Beijing. While I knew that entering a territory where few had been
before would require a lot of experimentation and learning, I soon realized I had
sorely underestimated the complexity of the task we had set for ourselves and
the amount of time it would take. I found myself constantly on the phone at three
in the morning, trying to make sense of the shaky accounting and questionable
controls at the companies we were interested in—with all my Bridgewater
responsibilities awaiting me when the sun came up.
After about a year of this, I could see that running both Bridgewater and
Bridgewater China Partners wasn’t going to be possible, so I closed its doors.
Nobody made or lost any money, because I hadn’t been comfortable enough
with what I was seeing to make any investments. I’m sure that if I had devoted
all my time to it, we would have had great success, but then Bridgewater would
not be what it is today. Despite passing up this great opportunity, I don’t regret
my choice. I learned that if you work hard and creatively, you can have just
about anything you want, but not everything you want. Maturity is the ability to
reject good alternatives in order to pursue even better ones.
While I stepped away from that opportunity, China remained an important
part of my own and my family’s lives. We loved it, especially the people. In
1995, my wife, Barbara, our eleven-year-old son, Matt, and I decided together
that Matt would spend a year in Beijing, attending an all-Chinese school and
living with our friend Madame Gu, who had stayed with us in America during
the Tiananmen Square days and whom Matt had visited in China with us when
he was three. Standards of living in China were very different from what Matt
was accustomed to in Connecticut. For example, the apartment Madame Gu and
her husband lived in had hot water for showers only twice a week, and the
school Matt attended didn’t have heat until well into the winter, so the students
wore their coats in the classrooms. Matt didn’t speak Chinese and none of his
classmates spoke English.
All of this was not just a huge adventure for Matt; it was completely
unprecedented and required special permission from the Chinese government. I
was excited for Matt because I knew he would see a different world and broaden
his mind. Barbara needed a little convincing and a couple of visits to a child
psychologist for reassurance, but she had lived all around the world herself and
knew how it had benefited her, so she was ultimately receptive to the idea, even
if she was less excited about being separated from her son. Matt’s difficult but
life-changing journey profoundly affected his values and goals. Because he fell
in love with China (he says that he became part Chinese that year) and because
he learned the value of empathy relative to the value of material wealth, he
started a charity called China Care to help Chinese special-needs orphans when
he was just sixteen. He ran it for twelve years (and, to a much lesser degree, still
does), while shifting his efforts to reconceive what computing can be in the
emerging world, which he is executing through his company Endless. I in turn
learned a lot from Matt, especially about the joys of philanthropy, and we both
learned the deep pleasures of great personal relationships. Over the years, I (and
in turn Bridgewater) have also built meaningful relationships with many
wonderful people in China, and we have helped its financial institutions grow
from fledgling organizations to sophisticated giants.
China wasn’t the only country whose people and governments Bridgewater
would become involved with. Through their representatives, Singapore’s, Abu
Dhabi’s, and Australia’s government investment funds, and Russian and
European policymakers, came knocking on our door. The experiences I have
had, the perspectives I gained, and the help I was able to provide all added up to
a package of rewards as large as any of the others that I got out of my career.
My contact with Singapore’s people and institutions also thrilled me. There
was and still is no leader I admire more than Lee Kuan Yew, who transformed
Singapore from a mosquito-infested backwater to a model economy. That says a
lot, as I have gotten to know and admire several world leaders. One of my most
thrilling moments was a dinner I had with him at my house in New York, shortly
before his death in 2015. Lee requested the dinner to discuss the state of the
world economy. I invited former Fed chairman Paul Volcker (another hero of
mine), former Treasury secretary Bob Rubin (whose breadth of experiences gave
great perspective), and Charlie Rose (one of the most curious and insightful
people I know). Besides answering his questions, we probed Lee on world
affairs and world leaders. Since he had personally known virtually all of the
world’s leaders over the last fifty years, we asked Lee about the qualities that
distinguished the great ones from the bad ones and what he thought of those who
were leading at the time. He rated Angela Merkel as the best leader in the West
and considered Vladimir Putin one of the best leaders worldwide. He explained
that leaders must be judged within the context of the circumstances they
encounter and then went on to share his view of how difficult it is to lead Russia
and why he thought Putin was doing it well. He also reflected on his unique
relationship with Deng Xiaoping, whom he regarded as the best leader of all.
I love getting to know interesting people from interesting places and seeing
the world through their eyes. This is true whether they are rich or poor. Seeing
life through the eyes of the indigenous people I got to know in Papua New
Guinea was as illuminating for me as gaining the perspectives of the political
and economic leaders, world-changing entrepreneurs, and cutting-edge scientists
I’ve spent time with. I’ll never forget the blind holy man I met in a mosque in
Syria, who explained the Quran and his connection to God to me. Encounters
like these have taught me that human greatness and terribleness are not
correlated with wealth or other conventional measures of success. I’ve also
learned that judging people before really seeing things through their eyes stands
in the way of understanding their circumstances—and that isn’t smart. I urge you
to be curious enough to want to understand how the people who see things
differently from you came to see them that way. You will find that interesting
and invaluable, and the richer perspective you gain will help you decide what
you should do.
MY FAMILY AND MY EXTENDED FAMILY
My family, my extended family of co-workers, and my work have all been
extremely important to me. Juggling work and family has been as much a
challenge to me as to anyone else, especially since I wanted both to be great, so I
combined them whenever I could. For example, I took my kids on business trips.
When at first I brought my son Devon and later Matt to my Chinese business
meetings, our hosts were always very kind—they would give them cookies and
milk. One great memory from Abu Dhabi was when my clients/friends took my
son Paul and me to the desert to eat a freshly killed and roasted goat with our
bare hands. I asked Paul, who was dressed in the traditional gown they’d given
him, how he liked it and he said, “What could be better than to sit on the floor,
dressed in pajamas, eating with my hands, with nice people?” We all laughed. I
remember another time when my eldest son, Devon, then about 10 years old,
brought back silk scarves from China he’d bought for $1 and sold for $20 in a
shopping mall just before Christmas—which was just the first sign of his
business savvy.
By the mid-1980s, Bridgewater had grown to about ten people, so I rented a
big old farmhouse. Bridgewater occupied part of it and my family occupied the
rest. It was extremely informal and family-like: Everyone parked in the
driveway, we met around the kitchen table, and my kids would leave the door
open while they sat on the toilet. The people I worked with would wave as they
walked by.
Eventually, the farm was put up for sale so I bought a barn on the property
and renovated it. My wife, our kids (eventually there were four), and I lived in a
small apartment inside the barn, and I made the unfinished hayloft usable as an
office by putting in electric baseboard heat, which I chose because it was
cheapest to install. It was a great space for parties and there was enough land for
us to play soccer and volleyball and have outdoor barbecues. For our company
Christmas party, we’d have a big potluck dinner with my family. After a few
drinks, Santa would show up and we’d all sit on his lap for a photo and find out
who had been naughty or nice. The night always ended with a lot of dancing. We
also had an annual “Sleaze Day” when everybody would dress up sleazy. You
get the idea: Bridgewater was a small community of friends who worked hard
and partied hard.
Bob Prince joined Bridgewater in 1986 when he was still in his twenties, and
more than thirty years later we are still close partners as co-chief investment
officers. From the very start, Bob and I “played great jazz together” whenever
we’d go back and forth on ideas. We still love doing that and will until one of us
dies. He is also a great teacher, both to clients and co-workers. Over time, he
became like my brother as well as one of the most critical builders and pillars of
Bridgewater.
Soon, Bridgewater began to look like a real company. We outgrew the barn
and moved into a small office in a strip mall; there were twenty of us by the end
of the 1980s. But even as we grew, I never thought of anybody I worked with as
an employee. I had always wanted to have—and to be around people who also
wanted to have—a life full of meaningful work and meaningful relationships,
and to me a meaningful relationship is one that’s open and honest in a way that
lets people be straight with each other. I never valued more traditional, antiseptic
relationships where people put on a façade of politeness and don’t say what they
really think.
I believe that all organizations basically have two types of people: those who
work to be part of a mission, and those who work for a paycheck. I wanted to
surround myself with people who needed what I needed, which was to make
sense of things for myself. I spoke frankly, and I expected those around me to
speak frankly. I fought for what I thought was best, and I wanted them to do so
as well. When I thought someone did something stupid, I said so and I expected
them to tell me when I did something stupid. Each of us would be better for it.
To me, that was what strong and productive relationships looked like. Operating
any other way would be unproductive and unethical.
MORE BIG TWISTS AND TURNS IN THE ECONOMY
AND MARKETS
1987 and 1988 were filled with more of those big twists and turns that helped
shape me and my approach to life and investing. We were one of the few
investment managers who were short stocks ahead of “Black Monday,” October
19, 1987, then the largest single-day percentage decline in the history of the
stock market. We got a lot of attention because we were up 22 percent when
most others were down a lot. The media dubbed us as among the “Heroes of
October.”
Naturally, I was feeling pretty good going into 1988. I had grown up in an era
of high volatility and had learned that the best way to play it was to get a hold of
a big move and ride it. We used our indicators to catch shifting fundamentals
and our technical trend-following filters to confirm that price movements were
consistent with what the indicators were suggesting. When they both pointed in
the same direction, we had a strong signal; when they were at odds, we had little
or no signal. But as it turned out there was hardly any volatility in 1988, and so
our technical filters whipsawed us and we ended up giving back a bit more than
half our 1987 gains. That stung, but it also taught us some important lessons and
prompted Bob and me to replace our technical trend-following filter with better
value measures and risk controls.
Until then our systems had been completely discrete—we would flip from a
fully long position to a fully short one when we crossed a predetermined
threshold (much as we switched from bonds to cash for the World Bank). But we
weren’t always equally confident in our views, and we’d also get killed paying
transaction costs when we crossed back and forth. That drove Bob crazy. I can
remember him running laps around the office building to calm himself down. So
at the end of the year, we moved to a more variable system that allowed us to
size our bets in relation to how confident we were. These and other
improvements Bob made to our systems have paid off many times since.
Not everyone at Bridgewater saw things as Bob and I did. Some in the
company doubted that systemization could work, especially when the systems
didn’t do well, which, like normal decision making, happened every now and
then. It took a lot of reasoning to persuade some of the people I worked with to
press on. But even if I couldn’t convince them, they couldn’t change my mind,
because they couldn’t show me why our approach of clearly specifying, testing,
and systemizing our logic wasn’t preferable to making decisions less
systematically.
All great investors and investment approaches have bad patches; losing faith
in them at such times is as common a mistake as getting too enamored of them
when they do well. Because most people are more emotional than logical, they
tend to overreact to short-term results; they give up and sell low when times are
bad and buy too high when times are good. I find this is just as true for
relationships as it is for investments—wise people stick with sound
fundamentals through the ups and downs, while flighty people react emotionally
to how things feel, jumping into things when they’re hot and abandoning them
when they’re not.
Despite our relatively poor investment performance, 1988 was a great year
for Bridgewater, because by reflecting on and learning from our poor
performance, we made systematic improvements. I have come to realize that bad
times coupled with good reflections provide some of the best lessons, and not
just about business but also about relationships. One has many more supposed
friends when one is up than when one is down, because most people like to be
with winners and shun losers. True friends are the opposite.
I got a lot out of my bad times, not just because they gave me mistakes to
learn from but also because they helped me find out who my real friends were—
the friends who would be with me through thick and thin.
THE NEXT FOOTHOLD FOR BRIDGEWATER
As the 1980s came to an end, we were still a very small company, with just two
dozen employees. Bob introduced me to Giselle Wagner in 1988. She would be
my partner in running the noninvestment side of the business for twenty years.
Dan Bernstein and Ross Waller joined in 1988 and 1989, respectively, both fresh
out of Dartmouth College. At that time, and for quite a while longer, I tended to
hire people just out of school who didn’t have much experience but were smart,
determined, and committed to the mission of making the company great.
I didn’t value experience as much as character, creativity, and common sense,
which I suppose was related to my having started Bridgewater two years out of
school myself, and my belief that having an ability to figure things out is more
important than having specific knowledge of how to do something. It seemed to
me, young people were creating sensible innovation that was exciting. Older
folks who did things in the old ways held no appeal. I should add, though, that
putting responsibility in the hands of inexperienced people doesn’t always work
out so well. Some painful lessons that you’ll read about later taught me that it
can be a mistake to undervalue experience.
By now, the initial $5 million from the World Bank had grown to $180
million in investments that we were managing for a variety of clients, but we
were still trying to grab a larger foothold in the institutional investment business.
When Rusty Olson, CIO of Kodak’s pension fund, approached us to solve an
investment problem, we jumped at the chance. Rusty was a remarkable
innovator and a man of great character who’d started at Kodak in 1954 and took
over its pension fund in 1972; he was widely respected as a leader in the pension
fund world. We’d been sending him our research for a while, and in 1990 he
wrote us looking for our opinion on a big concern of his. The Kodak portfolio
was heavily invested in equities and Rusty was worried about what would
happen in an environment in which the value of his assets fell badly. He had
been trying to come up with a way to hedge himself against this risk without
reducing his expected return.
Rusty’s fax arrived on a Friday afternoon and we leaped into action. Getting a
client this prestigious and innovative would make a big difference to us. We
knew we could do a uniquely great job for Kodak, because we knew a lot about
bonds and financial engineering, and we had a historical perspective unmatched
in the industry. Bob Prince, Dan Bernstein, and I worked nonstop through the
weekend, analyzing the Kodak portfolio and the strategy Rusty was considering.
Then we wrote him a long memo laying out our thoughts.
Just as I had deconstructed the business of a chicken producer in the 1970s
and many other companies since, we broke down Kodak’s pension fund into its
constituent parts to better understand the “machine.” Our proposed solutions
drew on the portfolio-engineering ideas that would later become core to
Bridgewater’s unique way of managing money. Rusty invited Bob and me to
Rochester, and we came home with the $100 million account. That was a game
changer. Not only did it bring us a lot of credibility, it provided us with a reliable
source of revenue at a time when we needed it.
DISCOVERING THE “HOLY GRAIL OF INVESTING”
From my earlier failures, I knew that no matter how confident I was in making
any one bet I could still be wrong—and that proper diversification was the key to
reducing risks without reducing returns. If I could build a portfolio filled with
high-quality return streams
3 that were properly diversified (they zigged and
zagged in ways that balanced each other out), I could offer clients an overall
portfolio return much more consistent and reliable than what they could get
elsewhere.
Decades earlier, the Nobel Prize–winning economist Harry Markowitz had
invented a widely used model that allowed you to input a set of assets along with
their expected returns, risks, and correlations (showing how similarly those
assets have performed in the past) and determine an “optimal mix” of those
assets in a portfolio. But his model didn’t tell you anything about the incremental
effects of changing any one of those variables, or how to handle being uncertain
about those assumptions. By then I was terribly fearful about what would happen
if my assumptions were wrong, so I wanted to understand diversification in a
very simple way. I asked Brian Gold, a recently graduated math major from
Dartmouth who’d joined Bridgewater in 1990, to do a chart showing how the
volatility of a portfolio would decline and its quality (measured by the amount of
return relative to risk) would improve if I incrementally added investments with
different correlations. I’ll explain it in more detail in my Economic and
Investment Principles.
That simple chart struck me with the same force I imagine Einstein must have
felt when he discovered E=mc2: I saw that with fifteen to twenty good,
uncorrelated return streams, I could dramatically reduce my risks without
reducing my expected returns. It was so simple but it would be such a
breakthrough if the theory worked as well in practice as it did on paper. I called
it the “Holy Grail of Investing” because it showed the path to making a fortune.
This was another key moment in our education.
The principle we’d discovered applies equally well to all ways of trying to
make money. Whether you own a hotel, run a technology company, or do
anything else, your business produces a return stream. Having a few good
uncorrelated return streams is better than having just one, and knowing how to
combine return streams is even more effective than being able to choose good
ones (though of course you have to do both). At the time (and still today), most
investment managers did not take advantage of this. They managed investments
in a single asset class: equity managers managed equities, bond managers
managed bonds, and so on. Their clients gave them money with the expectation
that they would receive the overall return of the asset class (e.g., the S&P 500
stock market index) plus some added returns from the bets managers took by
over- and under-weighting particular assets (e.g., buying more Microsoft stock
than was in the index). But individual assets within an asset class are generally
about 60 percent correlated with each other, which means they go up or down
together more than half the time. As the Holy Grail chart showed, an equity
manager could put a thousand 60 percent-correlated stocks into their portfolios
and it wouldn’t provide much more diversification than if they’d picked only
five. It would be easy to beat those guys by balancing our bets in the way the
chart indicated.
Thanks to my process of systematically recording my investment principles
and the results they could be expected to produce, I had a large collection of
uncorrelated return streams. In fact, I had something like a thousand of them.
Because we traded a number of different asset classes, and within each one we
had programmed and tested lots of fundamental trading rules, we had many
more high-quality ones to choose from than a typical manager who was tracking
a smaller number of assets and was probably not trading systematically.
I worked with Bob and Dan to pull our best decision rules from the pile. Once
we had them, we back-tested them over long time frames, using the systems to
simulate how the decision rules would have worked together in the past.
We were startled by the results. On paper, this new approach improved our
returns by a factor of three to five times per unit of risk, and we could calibrate
the amount of return we wanted based on the amount of risk we could tolerate.
In other words, we could make a ton more money than the other guys, with a
lower risk of being knocked out of the game—as I’d nearly been before. I called
it the “killer system” because it would either produce killer results for us and our
clients or it would kill us because we were missing something important.
The success of this approach taught me a principle that I apply to all parts of
my life: Making a handful of good uncorrelated bets that are balanced and
leveraged well is the surest way of having a lot of upside without being exposed
to unacceptable downside.
As excited as we were about this new approach, we proceeded cautiously. We
gave the system a 10 percent weight initially and it made money in nineteen of
the twenty months in our test period. As we got more confident, I decided to
reach out to a select group of investors I knew well about investing in the
strategy with $1 million trial accounts. I knew that asking these institutional
investors to invest such relatively modest amounts would make it hard for them
to turn us down. I called the new product “Top 5%” at first, because it comprised
the best 5 percent of our decision rules; later I changed the name to Pure Alpha
to convey that it consisted purely of alphas. Because Pure Alpha didn’t have any
betas, it didn’t have any bias to go up or down along with any market. Its returns
depended only on how good we were in outperforming others.
Our totally new “alpha overlay” approach allowed investors to receive the
return of their chosen asset class (the S&P 500 stock market, a bond index,
commodities—whatever) plus the return from the portfolio of bets that we were
making across all asset classes. As unprecedented as our approach was, we
explained our logic carefully, showing why it was actually much less risky than
traditional approaches. We also showed them how we expected the cumulative
performance to unfold and what the expected range of performance around that
would be. For our clients, it was a bit like being presented with the design of a
plane that had never flown before but looked radically better than any other
plane on paper. Would anyone be courageous enough to get on board?
Some clients got the concepts and were excited to change the rules; others
either didn’t understand or worked for organizations that refused to try cuttingedge things. Frankly, we were thrilled that any of them were willing to try. For
over twenty-six years now, that new type of plane has flown exactly as we
anticipated, making money in twenty-three of these years (having only modest
losses in the other three) and making more money in total for our clients than
any other hedge fund ever. While the investment management concepts that
underlie Pure Alpha eventually changed our industry, the journey from
conception to general acceptance took many years of learning and grinding work
by a group of dedicated partners.
GETTING OUR KILLER SYSTEM OUT INTO THE
WORLD
Pure Alpha represented the best way we knew to actively manage money, but we
also knew that if we wanted to manage a meaningful amount of institutional
money, we had to accept the reality that only a limited number of innovative
clients would try the approach. So while we tried to convince clients to adopt our
way, by the end of the 1990s and into the early 2000s, Pure Alpha made up only
around 10 percent of our total assets under management.
Even though we couldn’t trade stocks and commodities in our pure bond
accounts, we applied the portfolio structuring principles we’d discovered and
used with Pure Alpha to give our bond clients higher returns at lower levels of
risk. This included trading foreign government bonds, emerging market debt,
inflation-linked bonds, corporate bonds, and the currency exposures that came
with the foreign investments. In our most unconstrained bond portfolios, we
would make about fifty different types of bets, way more than traditional bond
managers traded. Doing so gave us a big edge and landed us at the top of many
investment performance tables year after year.
Our Pure Alpha product was just the first of a number of innovative designs
we brought to our clients. In 1991, we had become the first currency overlay
managers for institutional investors. At the time, institutional investors were
placing larger portions of their portfolios into global equity and bond markets.
While investing internationally added valuable diversity, it also added
unmanaged currency exposure. This was a big problem because the currency
exposures added risk without adding any expected return. We had traded
currencies for years and had developed expertise in portfolio engineering, so we
were in a prime position to solve this problem. Eventually we became the largest
active currency manager in the world.
We also produced several other new and effective ways of managing money
that flew exactly as they were designed. With each one, we gave clients clearly
stated performance expectations expressed in a chart that showed an
accumulated profit line and the expected variations around that line. We could
do this because the systemization of our decision-making process allowed us to
stress-test the performance of our decision making under a wide variety of
conditions.
SYSTEMIZING OUR LEARNING FROM MISTAKES
Of course we continued to make mistakes, though they were all within our range
of expectations. What was great is that we made the most of our mistakes
because we got in the habit of viewing them as opportunities to learn and
improve. One of our most memorable mistakes happened in the early 1990s,
when Ross, who was in charge of trading at the time, forgot to put in a trade for
a client and the money just sat there in cash. By the time the mistake was
discovered, the damage was several hundred thousand dollars.
It was a terrible and costly error, and I could’ve done something dramatic like
fire Ross to set a tone that mistakes would not be tolerated. But since mistakes
happen all the time, that would have only encouraged other people to hide theirs,
which would have led to even bigger and more costly errors. I believed strongly
that we should bring problems and disagreements to the surface to learn what
should be done to make things better. So Ross and I worked to build out an
“error log” in the trading department. From then on, anytime there was any kind
of bad outcome (a trade wasn’t executed, we paid significantly higher
transaction costs than expected, etc.), the traders would make a record of it and
we would follow up. As we consistently tracked and addressed those issues, our
trade execution machine continually improved.
Having a process that ensures problems are brought to the surface, and their
root causes diagnosed, assures that continual improvements occur.
For that reason I insisted that an issue log be adopted throughout Bridgewater.
My rule was simple: If something went badly, you had to put it in the log,
characterize its severity, and make clear who was responsible for it. If a mistake
happened and you logged it, you were okay. If you didn’t log it, you would be in
deep trouble. This way managers had problems brought to them, which was
worlds better than having to seek them out. The error log (which we now call the
issue log) was our first management tool. I learned subsequently how important
tools are in helping to reinforce desired behaviors, which led us to create a
number of tools I will describe later.
This culture of bringing problems and disagreements to the surface generated
a lot of discomfort and conflict, especially when it came to exploring people’s
weaknesses. Before long, things came to a boil.
MY “INTRACTABLE” PEOPLE PROBLEM
One winter day in 1993, Bob, Giselle, and Dan proposed taking me out to dinner
with the stated purpose of “giving Ray feedback about how he affects people and
company morale.” They sent me a memo first, the gist of which was that my
way of operating was having a negative effect on everyone in the company.
Here’s how they put it:
What does Ray do well?
He is very bright and innovative. He understands markets and money
management. He is intense and energetic. He has very high standards and
passes these to others around him. He has good intentions about teamwork,
building group ownership, providing flexible work conditions to employees,
and compensating people well.
What Ray doesn’t do as well:
Ray sometimes says or does things to employees which makes them feel
incompetent, unnecessary, humiliated, overwhelmed, belittled, oppressed, or
otherwise bad. The odds of this happening rise when Ray is under stress. At
these times, his words and actions toward others create animosity toward
him and leave a lasting impression. The impact of this is that people are
demotivated rather than motivated. This reduces productivity and the quality
of the environment. The effect reaches far beyond the single employee. The
smallness of the company and the openness of communication means that
everyone is affected when one person is demotivated, treated badly, not
given due respect. The future success of the company is highly dependent on
Ray’s ability to manage people as well as money. If he doesn’t manage
people well, growth will be stunted and we will all be affected.
Ugh. That hurt and surprised me. I never imagined that I was having that sort
of effect. These people were my extended family. I didn’t want them to feel
“incompetent, unnecessary, humiliated, overwhelmed, belittled, oppressed, or
otherwise bad.” Why didn’t they tell me directly? What was I doing wrong?
Were my standards too high? For Bridgewater to continue to be a one-in-tenthousand–type company we had to have exceptional people and hold them to
extremely high standards. Was I demanding too much?
This looked to me like another one of those fork-in-the-road cases in which I
had to choose between one of two seemingly essential but mutually exclusive
options: 1) being radically truthful with each other including probing to bring
our problems and weaknesses to the surface so we could deal with them
forthrightly and 2) having happy and satisfied employees. And it reminded me
that when faced with the choice between two things you need that are seemingly
at odds, go slowly to figure out how you can have as much of both as possible.
There is almost always a good path that you just haven’t figured out yet, so look
for it until you find it rather than settle for the choice that is then apparent to you.
My first step was to make sure I knew exactly what the problems were and
how to handle them. So I asked Bob, Giselle, and Dan what they thought was
going on. I learned that they personally, and many others who knew me well,
weren’t as demoralized by me as some others because they understood my heart
was in a good place. If they hadn’t known that they would have quit, because, as
they put it, “I wasn’t paying them enough money to put up with my crap.”
They knew that I wanted the best for them and Bridgewater, and to get that I
needed to be radically truthful with them and I needed them to be radically
truthful with me. This wasn’t only because it produced better results, but also
because being truthful with each other was fundamental to how I believed we
should be with each other. We agreed that being this way was essential, but since
it was making some people feel bad, something had to change.
While those people I had contact with understood me, liked me, and in some
cases even loved me, those who had less contact with me were offended by my
directness. It was clear that I needed to be better understood and to understand
others better. I realized then how essential it is that people in relationships must
be crystal clear about their principles for dealing with each other.
That began our decades-long process of putting our principles into writing,
which evolved into the Work Principles. Those principles were both agreements
for how we would be with each other and my reflections on how we should
handle every situation that came up. Since most types of situations arose
repeatedly with slight variations, these principles were continually refined. As
for our agreements with each other, the most important one was our need to do
three things:
1. Put our honest thoughts out on the table,
2. Have thoughtful disagreements in which people are willing to shift their
opinions as they learn, and
3. Have agreed-upon ways of deciding (e.g., voting, having clear authorities)
if disagreements remain so that we can move beyond them without
resentments.
I believe that for any organization or for any relationship to be great, these
things are required. I also believe that for a group decision-making system to be
effective, the people using it have to believe that it’s fair.
Having our work principles written out and getting in sync about them in the
same way we had with our investment principles were essential for our
understanding each other, especially since our unique way of operating—this
radical truth and radical transparency—that led to our unique results is
counterintuitive and emotionally challenging for some.
Trying to understand how we could get our meaningful work and meaningful
relationships through this straightforwardness led me to speak with
neuroscientists, psychologists, and educators over the decades that followed. I
learned a lot, which I can summarize as follows. There are two parts of each
person’s brain: the upper-level logical part and the lower-level emotional part. I
call these the “two yous.” They fight for control of each person. How that
conflict is managed is the most important driver of our behaviors. That fighting
was the biggest reason for the problems Bob, Giselle, and Dan raised. While the
logical part of people’s brains could easily understand that knowing one’s
weaknesses is a good thing (because it’s the first step toward getting around
them), the emotional part typically hates it.
3 By “return streams,” I mean the returns that come from executing a particular decision rule—think of
them as lines on a chart that track the value of an investment through time, and the decision to either let it
continue to grow in value or sell.
4 This approach is what I call the “5-Step Process.” I’ll dive into it in more detail later on.
5 I’ll explore more on the topic of working with computer-aided decision-making systems in Chapter Five
of Life Principles, Learn How to Make Decisions Effectively.
6 With advances in digital technology, we continue to innovate our methods for recording and distributing
this content.
7 You can find the references to books by Robert Kegan, Edward Hess, and Adam Grant in the
bibliography.
8 Treasury secretary Hank Paulson’s moves, especially putting government money into systemically
important banks, were also crucial.
CHAPTER 5
THE ULTIMATE BOON:
1995–2010
By 1995, Bridgewater had grown to forty-two employees and $4.1 billion under
management, which was more than I’d ever hoped for, especially considering
that Bridgewater had been down to just me only a dozen years before. While
things were much better and more stable, we were still doing basically the same
things I’d been doing from the start—wrestling with the markets, thinking
independently and creatively about how to make our bets, making mistakes,
bringing those mistakes to the surface, diagnosing them to get at their root
causes, designing new and better ways of doing things, systematically
implementing the changes, making new mistakes, and so on.4 This iterative,
evolutionary approach allowed us to continually refine the investment systems
that I’d begun building in 1982. Back then, we showed that a few bright guys
with computers could beat the big, well-equipped establishment players. Now
we were becoming the well-equipped establishment ourselves.
As the number of decision rules and the amount of data in our systems grew
more complex, we hired young programmers who were better than us in
converting our instructions into code and smart new grads right out of college to
help with our investment research. One of these new whiz kids, Greg Jensen,
joined Bridgewater as a college intern in 1996. Because he shined, I grabbed him
as my research assistant. Over the decades that followed, he contributed a lot,
grew into the co-chief investment officer role with Bob Prince and me, and
became a co-CEO. He also became like a godson to me.
We also invested in more and more powerful computers.5 Having our systems
running through these machines freed us to get above the daily movements of
the markets and consider things from a higher level, where we could make
novel, creative connections that produced innovations for our clients.
DISCOVERING INFLATION-INDEXED BONDS
Around this time, I had dinner with David White, the man in charge of the
Rockefeller Foundation’s money. David asked me how I would engineer the
foundation’s portfolio to produce a return that was 5 percent above the U.S.
inflation rate. I answered that a portfolio of leveraged foreign inflation-indexed
bonds with the currency hedged back to U.S. dollars should deliver exactly that.
(The bonds needed to be foreign because there were no U.S. inflation-indexed
bonds at the time, and they needed to be hedged to the dollar so there would be
no currency risk.)
Thinking about this later, I realized that we could create an entirely new and
radically different asset class, so Dan Bernstein and I researched such a portfolio
more closely. According to our analysis, this new asset class would perform
even better than we’d thought. In fact, it would be uniquely effective because we
could engineer it to have the same expected return as equities but with less risk
and with a negative correlation with bonds and equities over long time frames.
We showed this research to our clients and they loved it. Before long, we
became the first global inflation-indexed bond manager in the world. In 1996,
U.S. Treasury deputy secretary Larry Summers began looking into whether the
U.S. should issue its own inflation-indexed bonds, and because we were the only
manager with a portfolio of such bonds, he called us in as experts.
Dan and I traveled down to Washington to meet with Summers, his Treasury
colleagues, and a number of representatives from well-known Wall Street firms.
We were late (punctuality isn’t one of my strengths) and the doors to the big
meeting room at Treasury were locked. I wasn’t going to let that stop me, so I
knocked until someone opened it. It was a large room with a table in the middle
and a press gallery off to the side. There was only one seat open at the table and
it had Dan’s nameplate in front of it—we’d agreed that he’d be our one allowed
representative since he’d done a lot of the prep work. I had forgotten that, so I
walked over to the press gallery, grabbed a chair, and carried it next to Dan’s so
I had a seat at the table too. Dan describes that meeting as an analogy for what it
was like for us in the 1990s in general: We had to barge our way into things.
Larry Summers has since said that the advice he got from us was the most
important in shaping this market. When the Treasury did create the bonds, they
followed the structure we recommended.
DISCOVERING RISK PARITY
By the mid-1990s, I had enough money to set up a trust for my family, so I
began to think about what the best asset allocation mix for preserving wealth
over generations would look like. In my years as an investor, I had seen all sorts
of economic and market environments and all kinds of ways that wealth could be
created and destroyed. I knew what drove asset returns, but I also knew that no
matter what asset class one held, there would come a time when it would lose
most of its value. This included cash, which is the worst investment over time
because it loses value after adjusting for inflation and taxes. I also knew how
difficult it was to anticipate the swings that cause those losses. I’ve devoted my
life to it and I’ve made my share of bad calls; anticipating these swings wasn’t
something I’d bet on others doing well when I wasn’t around. Finding investors
who have done well in all economic environments—when inflation rises and
when it falls, when there are booms and when there are busts—is like finding
needles in a haystack, and they don’t live forever so that’s not a viable path. I
didn’t want the wealth I had created to protect my family to be wiped out after I
was gone. That meant I had to create a mix of assets that could be good in all
economic environments.
I knew which shifts in the economic environment caused asset classes to
move around, and I knew that those relationships had remained essentially the
same for hundreds of years. There were only two big forces to worry about:
growth and inflation. Each could either be rising or falling, so I saw that by
finding four different investment strategies—each one of which would do well in
a particular environment (rising growth with rising inflation, rising growth with
falling inflation, and so on)—I could construct an asset-allocation mix that was
balanced to do well over time while being protected against unacceptable losses.
Since that strategy would never change, practically anyone could implement it.
And so, with help from Bob and Dan, I created a portfolio mix that I could
comfortably put my trust money in for the next hundred or more years. I called it
the “All Weather Portfolio” because it could perform well in all environments.
Between 1996 and 2003 I was the only “client” investing in it because we
didn’t sell it as a product. But in 2003, the head of Verizon’s pension fund, a
longtime client, told us he was looking for an approach to investing that would
do well across all environments. After Verizon made its investment, others
quickly followed, and a dozen years later we were managing nearly $80 billion.
It was another industry-shaping concept. Seeing its success, other investment
managers followed with their own versions. It is now generically called “risk
parity” investing.
TO REMAIN A BEAUTIFUL BOUTIQUE OR BECOME
A GREAT INSTITUTION?
With our people and culture producing these industry-shaping investment
products, Bridgewater really took off. By 2000, we were managing more than
$32 billion, almost eight times what we had been managing just five years
before. Our head count had doubled, so we moved out of our strip mall office
into a larger space situated in a nature preserve on the banks of the Saugatuck
River. But while we continued to grow, it was never clear sailing. Building the
business while managing investments required me to do two challenging jobs
simultaneously and develop two distinct skill sets, while being a good father,
husband, and friend. The demands of these roles changed over time, so the skills
and abilities I needed changed as well.
Most people assume that the challenges that go along with growing a large
business are greater than those of growing a smaller one. That is not true. Going
from a five-person organization to a sixty-person organization was just as
challenging as going from a sixty-person organization to a seven-hundred-person
organization—and from a seven-hundred-person organization to a 1,500-person
one. Looking back, I can’t say that the challenges were easier or harder at any of
the various phases we went through. They were just different. For example,
when I had no one to manage, I had the challenge of having to do almost
everything myself. When I learned and earned enough to pay others, I had the
challenge of managing them. Similarly, the challenges of wrestling with market
and economic swings were constantly changing. I didn’t think about it then, but
it’s obvious to me now that while one gets better at things over time, it doesn’t
become any easier if one is also progressing to higher levels—the Olympic
athlete finds his sport to be every bit as challenging as the novice does.
Very soon we faced another critical choice: What kind of company did we
want to have? Should we continue to grow or stay about the same size?
By 2003, I had come to believe that we needed to grow Bridgewater into a
real institution instead of remaining a typical boutique-sized investment
manager. Doing this would make us better in many ways—better technology,
better security controls, a deeper talent pool—all of which would make us more
stable and permanent. This meant hiring more people in technology,
infrastructure, and other areas, as well as additional HR and IT staff to train and
support them.
Giselle argued strongly that we should not grow. She believed that
introducing a lot of new people would threaten our culture, and that the time and
attention that hiring, training, and managing them required would dilute our
focus. While I agreed with her points, I didn’t like the alternative of not allowing
ourselves to become all we could be. I felt about this fork-in-the-road choice the
way I felt about most others—that whether or not we could have our cake and
eat it too was merely a test of our creativity and character. For example, I could
envision ways in which technology would help us get the most out of people.
After a fair amount of wrestling with these questions, we decided to go ahead.
FLESHING OUT PRINCIPLES
Ever since Bob, Giselle, and Dan had presented me with the “Ray Feedback
Memo” in the 1990s, I had been much more explicit in writing down and sharing
my work principles in the same way I had written down my investment
principles. At first, this took the form of shared philosophy statements and
emails to the entire company. Then, whenever something new came along that
required me to make a decision, I would reflect on my criteria for making that
decision and write it down as a principle so people could make the connections
between the situation, my principle for handling these situations, and my actions.
More and more, we saw everything as “another one of those”—another of a
certain type of situation like hiring, firing, determining compensation, dealing
with dishonesty—that had principles for handling them. By having them
explicitly written out, I could foster the idea meritocracy by having us together
reflect on and refine those principles—and then adhere to them.
The number of principles started small and grew over time. By the mid2000s, Bridgewater was beginning to grow rapidly, and we had a number of new
managers trying to learn and adapt to our unique culture—and who were
increasingly asking me for advice. I was also beginning to have people from
outside Bridgewater ask me how they could create idea meritocracies of their
own. So in 2006, I prepared a rough list of about sixty Work Principles and
distributed them to Bridgewater’s managers so they could begin to evaluate
them, debate them, and make sense of them for themselves. “It’s a rough draft,”
I wrote in the covering memo, “but it is being put out now for comments.”
This began an ongoing evolutionary process of encountering many situations,
forming principles about how to deal with them, and getting in sync with other
Bridgewater leaders and managers about them. Over time, I encountered most
everything there is to encounter in running a company, so I had a few hundred
principles that covered most everything. That collection of principles, like our
collection of investment principles, became a kind of decision-making library.
Those principles are the basis of what you’ll find in Work Principles.
But it wasn’t enough to codify and teach our philosophy; we had to live it. As
the company grew bigger, how that happened evolved. In Bridgewater’s early
days, everyone knew each other, so being radically transparent was easy—
people could attend the meetings they wanted to and communicate with each
other informally. But as we grew, that became logistically impossible, which
was a real problem. How could people engage productively with the idea
meritocracy if they didn’t know everything that was going on? Without
transparency, people would spin whatever happened to suit their own interests,
sometimes behind closed doors. Problems would be hidden instead of brought to
the surface where they could be resolved. To have a real idea meritocracy, there
must be transparency so that people can see things for themselves.
To make sure this happened, I required that virtually all our meetings be
recorded and made available to everyone, with extremely rare exceptions such as
when we were discussing very private matters like personal health or proprietary
information about a trade or decision rule. At first I sent these tapes of
management meetings unedited to the entire company, but that was a huge
burden on people’s time. So I built a small team to edit the tapes, focusing on the
most important moments, and over time we added questions to create “virtual
reality” case studies that could be used for training.6 Over time, these tapes
became part of a “boot camp” for new employees as well as a window into an
ongoing stream of situations connected to the principles for handling them.
All this openness led to some very frank discussions about who did what and
why, and as a result we were able to deepen our understanding of our different
ways of thinking. This was enlightening to all of us in showing how differently
people’s brains worked. If nothing else, I could better appreciate people I’d once
wanted to strangle! Moreover, I recognized that managers who do not
understand people’s different thinking styles cannot understand how the people
working for them will handle different situations, which is like a foreman not
understanding how his equipment will behave. That insight led us to explore
psychometric testing as a way of learning how people think differently.
DISCOVERING PSYCHOMETRIC TESTING
Early in my kids’ lives, I’d had them tested by a brilliant psychologist named
Sue Quinlan. Her assessments proved spot-on and provided a great road map for
how they would develop over the years. Because that testing process had been so
successful, I worked with her and others to try to identify the best tests for
determining what the people I worked with were like. In 2006, I took the MyersBriggs Type Indicator (MBTI) assessment for the first time and found its
description of my preferences to be remarkably accurate.
Many of the differences it described, such as those between “intuiting
people,” who tend to focus on big-picture concepts, and “sensing people,” who
pay more attention to specific facts and details, were highly relevant to the
conflicts and disagreements we were having at Bridgewater. I began to look for
other tests that could help us deepen our understanding of each other. This was
slow going at first, largely because most of the psychologists I met were
surprisingly squeamish about exploring differences. But eventually I found a few
great people, especially a psychologist named Bob Eichinger, who pointed me to
a number of other very useful tests.
In early 2008, I had most of Bridgewater’s managers take the Myers-Briggs
assessment. The results astounded me. I couldn’t believe that some of them
actually thought in the ways the test described, yet when I asked them to rate
how well it described them on a scale of one to five, more than 80 percent of
them gave it a four or five.
CREATING BASEBALL CARDS
Even after we were armed with the Myers-Briggs data and other tests we’d
taken, I found that we were still having a hard time connecting the dots between
the outcomes that we were seeing and what we knew about the people producing
them. Over and over again, the same people would walk into the same meetings,
do things the same ways, and get the same results without seeking to understand
why. (Recently I came across a study that revealed a cognitive bias in which
people consistently overlook the evidence of one person being better than
another at something and assume that both are equally good at a task. This was
exactly what we were seeing.) For example, people who were known not to be
creative were being assigned tasks that required creativity; people who didn’t
pay attention to details were being assigned to detail-oriented jobs, and so on.
We needed a way to make the data that showed what people were like even
clearer and more explicit, so I began making “Baseball Cards” for employees
that listed their “stats.” The idea was that they could be passed around and
referred to when assigning responsibilities. Just as you wouldn’t have a great
fielder with a .160 batting average bat third, you wouldn’t assign a big-picture
person a task requiring attention to details.
At first, this idea met a lot of resistance. People were concerned that the
Baseball Cards wouldn’t be accurate, that producing them would be too timeconsuming, and that they would only succeed in pigeonholing people unfairly.
But over time, everyone’s attitudes toward this approach of openly exploring
what people are like shifted 180 degrees. Most people found that having this
information out in the open for everyone to see was more liberating than
constraining because when it became the norm, people gained the sort of
comfort that comes with just being themselves at work that family members
have with each other at home.
Because this way of operating was so unusual, a number of behavioral
psychologists came to Bridgewater to evaluate it. I urge you to read their
assessments, which were overwhelmingly favorable.7 The Harvard psychologist
Bob Kegan called Bridgewater “a form of proof that the quest for business
excellence and the search for personal realization need not be mutually exclusive
—and can, in fact, be essential to each other.”
I should also explain that my personal circumstances at the time also drew me
to psychology and neurology. While for the most part I am keeping my family
members’ lives out of this book to protect their privacy, I will tell you this one
story about my son Paul as it is relevant and he is open about it.
After graduating from NYU’s Tisch film school, Paul headed out to Los
Angeles to take a job. One day he went to the front desk of the hotel where he
was staying while he looked for an apartment and smashed their computer. He
was arrested and thrown in jail, where he was beaten up by guards. Ultimately,
he was diagnosed with bipolar disorder, released into my custody, and admitted
to the psychiatric ward of a hospital.
That was the beginning of a three-year roller-coaster ride that took Paul,
Barbara, and me to the peaks of his manias and the depths of his depressions,
through the twists and turns of the health care system, and into discussions with
some of the most brilliant and caring psychologists, psychiatrists, and
neuroscientists at work today. There is nothing to prompt learning like pain and
necessity, and this gave me plenty of both. At times I felt as though I was
holding Paul by the hand as he was dangling over a cliff—from one day to the
next, I never knew whether I could hold on or if he would slip from my grip. I
worked intensely with his caregivers to understand what was going on and what
to do about it. Thanks both to the help he received and his own great character,
Paul worked through this and is now better off than if he hadn’t fallen into his
abyss, because he developed strengths he didn’t have but needed. Paul was once
wild—staying out till all hours, disorganized, smoking marijuana and drinking—
but he now faithfully takes his meds, meditates, goes to bed early, and avoids
drugs and alcohol. He had loads of creativity but lacked discipline. Now he has
plenty of both. As a result, he is more creative now than he was before and is
happily married, the father of two boys, an accomplished filmmaker, and a
crusader helping those who struggle with bipolar disorder.
His radical transparency about being bipolar and his commitment to helping
others with it inspires me. His first feature film, Touched with Fire, which
received lots of acclaim, gave many people who might have lost their lives to
bipolar disorder both the hope and the path forward they needed. I remember
watching him shoot one scene based on a real conversation between us in which
he was manic and I was struggling to reason with him. I could simultaneously
see the actor playing Paul at his worst while the real Paul was at his best,
directing the scene. As I watched, my mind flashed over his whole journey—
from the depths of his abyss, through his metamorphosis into the strong hero
standing in front of me, someone on a mission to help others going through what
he had gone through.
That journey through hell gave me a much deeper understanding of how and
why we see things differently. I learned that much of how we think is
physiological and can be changed. For example, Paul’s wild swings were due to
the inconsistent secretions of dopamine and other chemicals in his brain, so he
could change by controlling those chemicals and the activities and stimuli
affecting them. I learned that creative genius and insanity can be quite close to
each other, that the same chemistry that creates insights can cause distortions,
and that being stuck in one’s own head is terribly dangerous. When Paul was
“crazy,” he always believed his own illogical arguments, no matter how strange
they sounded to others. While more extreme in the case of someone with bipolar
disorder, this is something I’ve seen most everyone do. I also learned how
people can control how their brains work to produce dramatically better effects.
These insights helped me to deal with people more effectively, as I will explain
in detail in Chapter Four, Understand That People Are Wired Very Differently.
MAKING BRIDGEWATER ROCK-SOLID AND
CUTTING-EDGE
At our annual town hall meeting in June 2008, I said that seen through my eyes
Bridgewater was then, and always had been, “both terrible and terrific at the
same time.” After about five years of rapid growth toward building Bridgewater
as an institution, we had encountered our newest set of problems. This was
nothing new. Since I started Bridgewater we always had some problems because
we were always doing bold new things, making mistakes, and evolving quickly.
For example, technology had changed so quickly during the years we’d built the
company that we had literally switched from using slide rules to spreadsheet
software to advanced artificial intelligence. With so much changing so fast, it
had seemed pointless to focus on getting everything “just right” when something
newer and better was sure to come along. So we built our technology in a light
and flexible way, which made sense at the time but also created a number of
hairballs that badly needed untangling. That same approach of moving quickly
and flexibly had been true throughout the company, so several departments had
become overstretched as we grew. It had always been fun being cutting-edge,
but we were having a hard time becoming rock-solid, especially in the
noninvestment side of the business. The organization needed to be renovated in
several ways—but it wasn’t going to be easy.
In 2008 I was working about eighty hours a week doing my two full-time jobs
(overseeing our investments and overseeing the company), and in my opinion
not doing well enough at either. I felt that I, and the company more broadly,
were slipping from being pervasively excellent. From the get-go I had toggled
acceptably between investment management and business management. But now
that we were a bigger company, the business management side was demanding
much more time than I had to give it. I conducted a time-and-motion study of all
of my investment and management responsibilities; it showed it would take me
about 165 hours a week to achieve the level of excellence that I would be
satisfied with in overseeing both our investments and management. That was
obviously impossible. Since I wanted to delegate as much as possible, I asked
whether the things I was doing could be done excellently by others, and if so,
who those others were. Everyone agreed that most of those areas couldn’t
adequately be delegated. I clearly hadn’t done a good enough job of finding and
training others to whom I could delegate my responsibilities.
To me, the greatest success you can have as the person in charge is to
orchestrate others to do things well without you. A step below that is doing
things well yourself, and worst of all is doing things poorly yourself. As I
reflected on my position, I could see that despite all of my and Bridgewater’s
amazing achievements, I had not achieved this highest level of success. In fact, I
was still struggling to achieve the second-highest level (doing things well
myself), even though Bridgewater was extremely successful.
At the time, there were 738 people working at Bridgewater, with fourteen
department heads. I oversaw the department heads, along with a Management
Committee I’d created because I knew I couldn’t trust myself to know what was
best without others probing me. I had structured the reporting lines so that I both
reported to the Management Committee and held its members accountable for
their oversight of the company. I wanted them to also own the responsibility of
producing pervasive excellence and I wanted to be at their service in helping
them achieve it.
In May 2008, I wrote an email to the five members of the Management
Committee, copying the company, telling them that “I am escalating to let you
know that I have reached my limits and that the quality of my work, and my
work-life balance, are both suffering unacceptably.”
THE FINANCIAL AND ECONOMIC CRISIS OF 2008
Recognizing that I was stretched wouldn’t by itself be enough to slow the flow
of things coming at me, especially in the investment area at what proved to be a
time of historic turbulence.
Because too often I had been painfully surprised by different types of events
that hadn’t happened to me before but happened in other times or other places—
like the currency devaluation of 1971, or the debt crisis in the early 1980s—I’d
developed our economic and market principles to be timeless and universal. In
other words, I knew that we needed to understand all important economic and
market movements, not just those that happened to me, and to make sure the
principles we were using to position ourselves would have worked in all past
times and all other countries.
As a result, back in the early 2000s, we had included a “depression gauge” in
our systems that specified the actions we should take if a certain configuration of
events began to play out in a way indicating a heightened risk of a debt crisis and
depression. In 2007, this gauge indicated that a bubble of debt was nearing its
bursting point because the costs of debt service were outpacing projected cash
flows. Because interest rates were so close to 0 percent, I knew that central
banks could not ease monetary policy enough to reverse the downturn the way
they had in prior recessions. This was the exact configuration that had led to past
depressions.
My mind and gut flashed back to my 1979–82 experience. I was now both
thirty years more knowledgeable and a whole lot less confident. While the
dynamic in the economy seemed clear to me, I was much less sure I was right. I
remembered how clearly it had seemed to me that the debt bust I’d been
expecting in 1982 would sink the economy—and how painfully wrong I had
turned out to be.
That experience also drove me to learn a lot more about debt crises and their
effects on the markets, and I researched and traded through a number of them,
including the Latin American debt crisis in the 1980s, the Japanese debt crisis of
the 1990s, the blowup of Long-Term Capital Management in 1998, the bursting
of the dot-com bubble in 2000, and the fallout from the attacks on the World
Trade Center and Pentagon in 2001. With the help of my teammates at
Bridgewater, I took history books and old newspapers and went day by day
through the Great Depression and the Weimar Republic, comparing what
happened then with what was happening in the present. The exercise only
confirmed my worst fears: It seemed inevitable to me that large numbers of
individuals, companies, and banks were about to have serious debt problems and
that the Federal Reserve couldn’t lower interest rates to cushion the blow, as was
the case in 1930–32.
My fear of being wrong pushed me to seek out other smart folks to poke holes
in my view. I also wanted to walk key policymakers through my thinking, both
to stress-test it and to make them aware of the situation as I saw it, so I went to
Washington to speak with people in both the U.S. Treasury and the White
House. Though they were polite, what I was presenting seemed too far-fetched
to them, especially when by all outward indications the economy seemed to be
booming. Most of them didn’t go very deep into our reasoning or calculations
before they dismissed them, with one exception: Ramsen Betfarhad, Vice
President Dick Cheney’s deputy assistant of domestic policy. He worked
through all our numbers and was concerned by them.
Because everything we saw lined up and we couldn’t find anyone who could
refute our views, we prepared our clients’ portfolios by balancing our positions
in a way that there would be considerable upside and limited downside in the
portfolios if we were right and putting in a backup plan in case we were wrong.
Though we thought we were well prepared, we were as worried about being
right as we were about being wrong. The prospect of the world economy going
over a waterfall was scary to all of us because of what it might mean to those
who weren’t protected.
As in 1982, when conditions deteriorated and circumstances increasingly
transpired as we’d predicted, policymakers began to pay more attention to us.
Betfarhad had me come to the White House to meet with him. Tim Geithner,
president of the New York Fed, asked to see me as well. I brought Bob, Greg,
and a young analyst named Bob Elliott to a lunch meeting with Geithner. We
walked him through the numbers and he literally turned white. When he asked
me where we’d gotten them from, I told him they were publicly available. We’d
just put them together and looked at them in a different way.
Two days after our meeting with Geithner, Bear Stearns collapsed. That
didn’t trigger much worry for most people or for the markets, though it was a
sign of what was to come. It wasn’t until six months later in September, when
Lehman Brothers collapsed, that everyone else connected the dots. At that point
the dominoes fell fast, and though they couldn’t contain all the damage,
policymakers, most importantly Fed chairman Ben Bernanke, reacted brilliantly
to create “a beautiful deleveraging” (i.e., a way of lowering debt burdens while
keeping economic growth positive and inflation low).8
To make this long story short, we navigated this period well for our clients,
anticipating market moves and avoiding losses. Our flagship fund made over 14
percent in 2008, a year when many other investors recorded losses of more than
30 percent. We would have done even better had we not feared being wrong,
which led us to balance our bets instead of arrogantly and foolishly putting more
chips at stake. But I had no regrets because I had learned that it wasn’t smart to
bet that way. While in this case we would have made more money if we were
less balanced, we certainly wouldn’t have survived and succeeded long enough
to be in such a position if we’d approached our investments in that way.
The 2008 debt crisis was another one of those like the one in 1982, which
were both like many more before them and many more that will come. I enjoyed
reflecting back on my painful mistakes and the value of the principles they gave
me. When the next big one comes along in twenty-five years or so, or who
knows when, it will probably come as a surprise and cause a lot of pain unless
those principles are properly encoded in algorithms put into our computers.
HELPING POLICYMAKERS
Our economic and market principles were very different from most others,
which accounted for our different results. I will explain these differences in
Economic and Investment Principles and won’t digress into them now.
As former Fed chairman Alan Greenspan put it, “The models failed at a time
when we needed them most . . . JP Morgan had the American economy
accelerating three days before [the Lehman Brothers’ collapse]—their model
failed. The Fed model failed. The IMF model failed . . . So that left me asking
myself: What happened?” Bill Dudley, president of the New York Fed, homed in
on the problem when he said, “I think there’s a fundamental problem in terms of
how macroeconomists look at the economic outlook, growth, and inflation . . . If
you look at the big macro models, they don’t have a financial sector typically in
them. They don’t admit the possibility that the financial sector could essentially
melt down, and therefore the monetary policy impulse could be completely
impaired. So I think the lesson of the crisis is to do a lot more work to make sure
that the finance people are talking to the macroeconomist people and building
models that are more robust.” He was right. We “finance people” see the world
very differently from the way economists do. As a result of our success,
policymakers reached out to us more, which led me to have a lot more contact
with senior economic policymakers in the U.S. and around the world. Out of
respect for the privacy of our conversations, I won’t say much about them except
to note that they became much more open to our nontraditional ways of looking
at economies and markets, and more skeptical about traditional economic
thinking, which had failed to either signal or avert the crisis.
Most of our exchanges were one-sided; I generally answered their questions
and didn’t ask any that would put them in the awkward position of having to
avoid answering for fear of compromising confidential information. I met with
these leaders without making judgments and without regard for their particular
ideologies. I approached them like a doctor, just wanting to make the most
beneficial impact.
They wanted my help because my global macroeconomic perspective as an
investor was very different from theirs as policymakers. We were both products
of our environments. Investors think independently, anticipate things that
haven’t happened yet, and put real money at stake with their bets. Policymakers
come from environments that nurture consensus, not dissent, that train them to
react to things that have already occurred, and that prepare them for negotiations,
not placing bets. Because they don’t benefit from the constant feedback about
the quality of their decisions that investors get, it’s not clear who the good and
bad decision makers among them are. They also have to be politicians. Even the
most clear-sighted and capable policymakers must constantly divert their
attention from the immediate problems they are dealing with to fight the
objections of other policymakers, and the political systems they must navigate
are often dysfunctional.
While the economic machine is more powerful than any political system in
the long run (ineffective politicians will be replaced and incapable political
systems will change), the interaction between the two is what drives economic
cycles in the here and now—and it’s often not pretty to watch.
MAKING GREAT RETURNS
Our returns in 2010 were the best ever—nearly 45 and 28 percent in our two
Pure Alpha funds and close to 18 percent in All Weather—almost exclusively
because the systems we had programmed to take in information and process it
were doing it superbly. These systems worked far better than we could with just
our brains. Without them, we would have had to manage money the old and
painful way: by trying to weigh in our heads all the markets and all the
influences on them and then bring them together into a portfolio of bets. We
would have had to hire and supervise a bunch of different investment managers,
and because we couldn’t have blind faith in them, we’d have had to understand
how each one made their decisions, which would mean watching what they were
doing and why so we could know what to expect from them, while dealing with
all their different personality issues. Why would I want to do that? It seemed to
me that that way of investing or managing an organization was obsolete, like
reading a map instead of following a GPS. Of course, building our system was
hard work—it had taken us over thirty years to do it.
Having too much money to manage can hurt performance, since the costs of
getting in and out of positions can be high because being too big can push the
markets. Making over 40 percent in 2010 had put us in the position of having to
return a lot of money to clients who actually wanted to give us more to manage.
We were always careful to stay safely short of being too big, lest we kill the
goose that lays the golden eggs.
Our clients didn’t want their money back—they wanted us to grow it. So we
were presented with the puzzle of how to maximize our capacity without hurting
our performance. We hadn’t looked at that before, because we’d never had that
much money. We quickly discovered that if we just tweaked what we did and
created a new fund that managed money the same way as Pure Alpha but
invested it solely in the most liquid markets, our expected returns would be the
same and the expected risk (i.e., volatility) only slightly higher.
We programmed this new approach into our computers, back-tested it to see
how it worked in all countries and time frames, and explained it to our clients in
detail so they could thoroughly understand the logic behind it. As much as I love
and have benefited from artificial intelligence, I believe that only people can
discover such things and then program computers to do them. That’s why I
believe that the right people, working with each other and with computers, are
the key to success.
Toward the end of the year, we opened “Pure Alpha Major Markets” and
clients invested $15 billion in it. Since then its returns have been as expected—
that is, about the same as Pure Alpha’s (actually better, but only slightly). Our
clients were delighted. In fact, this new option was so popular that by 2011 we
had to close it to new investment too.
GOING FROM BELOW THE RADAR TO ABOVE IT
Success is a double-edged sword—as I learned after we anticipated the financial
crisis and Bridgewater and I began to receive unwanted public attention. Our
unusual performance, our unusual way of looking at economics and markets, and
our unusual culture made us a continuing subject of interest. I wanted to stay
under the radar so I avoided interacting with the press. That didn’t stop the press
from writing about me and Bridgewater, which they typically did in a
sensationalistic way—either painting me as a superhero investor who walked on
water or as a leader of a cult, and sometimes both.
Getting a lot of attention for being successful is a bad position to be in.
Australians call it the “tall poppy syndrome,” because the tallest poppies in a
field are the ones most likely to have their heads whacked off. I didn’t like the
attention and I especially didn’t like the mischaracterizations of Bridgewater as a
cult, because I felt it was hurting our ability to recruit great people. At the same
time, I realized that because we didn’t let the media see how we truly operated
inside Bridgewater, those sensational portrayals were unavoidable.
So I decided in late 2010 to make public my Principles—which explained
exactly what we were doing and why. I put it on our website so it could be read
freely and understood by people outside the company.
Doing that was a hard decision, but it turned out to be a great one. Most
people got it and many beyond Bridgewater benefited from reading them. More
than three million people have downloaded Principles; some even had it
translated into their own languages at their own expense. I’ve received a large
number of thank-you notes from people who said that reading Principles had
changed their lives.
PREPARING BRIDGEWATER TO SUCCEED
WITHOUT ME
Since I was a kid, I’ve learned by doing. I’d just dive in after things I wanted and
try to survive long enough to learn from my mistakes and improve. If I changed
fast enough to become sustainable at whatever I was doing, then I would build
on that to flourish. I’ve always had great faith in my ability to figure things out,
and over time my need to figure things out made me better at doing so. As a
result, I tended to hire people who were the same way—who would dive right
into challenges, figure out what to do about them, and then do it. I figured that if
they had great character, common sense, and creativity, and were driven to
achieve our shared mission, they would discover what it took to be successful if
I gave them the freedom to figure out how to make the right decisions. I knew
that micromanaging and handcuffing them wouldn’t work because neither of us
would like it. If I was the one telling them what to do, I wouldn’t be getting any
leverage from them. Besides, I didn’t want to work with people who needed that.
But starting in the 1990s, I began to recognize the emotional barriers most
people had to looking at their problems and weaknesses forthrightly. Rather than
embracing ambiguous situations and difficult challenges, they tended to get
uncomfortable when facing them. It is the rare bird who has the right mix of
common sense, creativity, and character to shape change. Almost everyone
needs help before they can get there. So I wrote down my principles and the
logic behind them and shared them, hoping they could be used by those who
thought they were good and debated openly by those who didn’t. I figured that
over time we would all get in sync about how particular situations should be
handled.
But while almost all of us quickly agreed on the principles intellectually,
many still struggled to convert what they had agreed to intellectually into
effective action. This was because their habits and emotional barriers remained
stronger than their reasoning. The training and the virtual-reality tapes helped a
lot, but they still weren’t enough.
No matter how much effort we put into screening new hires and training them
to work in our idea meritocracy, it was inevitable that many of them would fall
short. My approach was to hire, train, test, and then fire or promote quickly, so
that we could rapidly identify the excellent hires and get rid of the ordinary ones,
repeating the process again and again until the percentage of those who were
truly great was high enough to meet our needs.
But for this to work, we needed people with high standards who wouldn’t
hesitate to eliminate people who couldn’t cut it. Many new employees (and some
older ones) still were reluctant to probe hard at what people were like, which
made things worse. It’s tough to be tough on people.
Of course, most of the people who come to Bridgewater are adventurous
types; they know what they’re getting into. They understand that the chances
their job will not work out are higher than normal, but they embrace the risk
because the upside of succeeding is huge relative to the downside of having it
not work out. In the worst case they learn a lot about themselves, have an
interesting experience, and leave for other jobs; in the best case, they become a
part of an exceptional team achieving exceptional things.
New hires typically go through an acclimation period of about eighteen to
twenty-four months before becoming comfortable with the truthfulness and
transparency that is such an essential part of the Bridgewater culture—especially
accepting one’s mistakes and figuring out how to deal with them. But some
people never adapt to it. I’ve been told that joining Bridgewater is a bit like
joining an intellectual Navy SEALs; others describe it as going to a school of
self-discovery run by someone like the Dalai Lama. The people who thrive say
that while the period of adjustment is difficult, it is also joyous because of the
excellence they achieve and the extraordinary relationships they make. And the
ones who can’t or won’t adapt must be cut; this is essential to keeping
Bridgewater excellent.
For a long time, I had been the one responsible for establishing the culture
and upholding its high standards. But in 2010, I was sixty years old and had been
running Bridgewater for thirty-five years. Though I expected to be good for
another ten years or so, I was ready to put my energy into other things. While I
always wanted to be deep into the markets, I wanted to spend more time with my
family and friends, to help policymakers, and to pursue a few growing passions
(like ocean exploration and philanthropy) as well as whatever else interested me.
My plan was to step out as CEO while helping my replacements as a mentor,
remain in my investment role, and take the time I gained from no longer
managing the company to suck the marrow out of life while I still could.
As with all organizations, whether Bridgewater would succeed would come
down to the people and the culture. People who run companies are faced with
important choices every day. How they make those choices determines the
character of the company, the quality of its relationships, and the outcomes it
produces. When the buck stopped with me, I was responsible for most of the
important decisions. Now those decisions would be in the hands of others. While
they would have a well-established culture and agreed-upon principles that had
worked for decades, the proof would be in the pudding.
CHAPTER 6
RETURNING THE BOON:
2011–2015
It seems to me that life consists of three phases. In the first, we are dependent on
others and we learn. In the second, others depend on us and we work. And in the
third and last, when others no longer depend on us and we no longer have to
work, we are free to savor life.
I was beginning my transition from my second to my third phase. Both
intellectually and emotionally, I was no longer as excited about being successful
as I was excited about having the people I cared about be successful without me.
I had two jobs at Bridgewater to transition out of: overseeing the management
of the company as chief executive officer, and overseeing the management of
our investments as a chief investment officer. I wasn’t going to stop playing the
markets, because that’s a game I’ve loved playing since I was twelve and I will
keep playing until I die. But I didn’t want to be needed in either role, because of
the key-man risk that would create for the company.
My partners and I understood that transitioning from the first generation of
leadership to the next in a founder-led organization with a unique culture is
difficult, especially if the leader has been in place for a long time. Bill Gates’s
transition out of the CEO role at Microsoft in 2008 was the most recent example
of that but there have been many others.
The biggest question I wrestled with was whether I should leave management
completely or stay involved as a mentor. On the one hand, I liked the idea of
stepping out completely because it would give the new leadership the freedom to
find their own ways of succeeding without me looking over their shoulder. My
friends urged me to do that—to “declare victory,” collect my chips, and move
on. But I wasn’t confident that the transition would go well, as I hadn’t done
such a thing before. I do things through trial and error—making mistakes,
figuring out what I did wrong, coming up with new principles, and finally
succeeding—and I didn’t see why my transition should be any different. I also
didn’t believe that it would be fair for me to dump the heavy workload I was
carrying on those I was passing my CEO responsibilities to. I knew that Lee
Kuan Yew, the wise founder and leader of Singapore for forty-one years, had
transitioned out of his leadership responsibilities to be a mentor, and I had seen
how well that went. For all those reasons, I decided I would stay on as a mentor.
That meant I would either not speak at all or speak last, but always be available
to provide advice. My partners liked the idea.
We agreed we should begin as soon as possible, so those replacing me could
gain experience and we could make adjustments as needed. Since what we didn’t
know about transitioning was greater than what we did know about it, we knew
we would need to be careful. We expected that transitioning well would take a
number of years—perhaps two or three, perhaps as many as ten. Since we had
worked together for many years, we were optimistic that it would be on the
shorter end of that range.
On the first day of 2011 I announced to the company that I would be stepping
down as CEO, with Greg Jensen and David McCormick replacing me. On July
1, I handed over my management responsibilities to Greg, David, and the rest of
the Management Committee. Simultaneously, we explained our “up-to-ten-year
transition plan” to our clients.
LEARNING WHAT SHAPERS ARE LIKE
Naturally the new management team struggled over the next eighteen months or
so. We diagnosed why in the same way an engineer would diagnose why a
machine is operating suboptimally so it could be reengineered to perform better.
Since different people produce different outcomes based on differences in what
they are like, whenever we create a team we seek to “engineer” the right mix of
attributes and people to achieve our goals. So we looked at my attributes relative
to others to see what was missing, which we called the “Ray gap.” To be clear,
we were looking at the “Ray gap” because I was the one leaving—had Bob,
David, or Greg been the ones stepping back, we would have been studying the
gaps they left.
Greg and David created a log of my various responsibilities and the
differences between the qualities they and I brought to handling them. Everyone
agreed the gap was in what we called “shaping.”
To visualize what I mean by “shaping” and “shapers,” think of Steve Jobs,
who was probably the greatest and most iconic shaper of our time, as measured
by the size and success of his shaping. A shaper is someone who comes up with
unique and valuable visions and builds them out beautifully, typically over the
doubts and opposition of others. Jobs built the world’s largest and most
successful company by revolutionizing computing, music, communications,
animation, and photography with beautifully designed products. Elon Musk (of
Tesla, SpaceX, and SolarCity), Jeff Bezos (of Amazon), and Reed Hastings (of
Netflix) are other great shapers from the business world. In philanthropy,
Muhammad Yunus (of Grameen), Geoffrey Canada (of Harlem Children’s
Zone), and Wendy Kopp (of Teach for America) come to mind; and in
government, Winston Churchill, Dr. Martin Luther King, Jr., Lee Kuan Yew,
and Deng Xiaoping. Bill Gates has been a shaper in both business and
philanthropy, as was Andrew Carnegie. Mike Bloomberg has been a shaper in
business, philanthropy, and government. Einstein, Freud, Darwin, and Newton
were giant shapers in the sciences. Christ, Muhammad, and the Buddha were
religious shapers. They all had original visions and successfully built them out.
While these are the biggest shapers, I saw that shapers come in varying sizes.
You probably know a few personally. They might be your local business,
nonprofit, or community leaders—the people who drive change and build lasting
organizations. My objective was to identify who the future shapers of
Bridgewater would be—either by helping the people who were replacing me in
the CEO job become them or by finding shapers on the outside and bringing
them in.
On October 5, 2011, a few months after I began to think about what makes a
shaper, Steve Jobs died. I wrote about him in our Daily Observations, one of the
very few times I used the space to address noninvestment-related content,
because I admired him as a man who could visualize and execute in
breathtakingly wonderful ways. Soon after, Walter Isaacson published his
biography of Jobs. I noticed a number of similarities between us, especially
when he quoted Jobs’s own words. Soon after that, an article titled “Is Ray Dalio
the Steve Jobs of Investing?” came out in aiCIO, a prominent investmentindustry publication. It also pointed out a number of similarities between us—
that I, like Jobs, started my businesses from scratch (his from a garage, mine
from the second bedroom of my apartment), that we both came up with
innovative products that reshaped how our industries did things, and that we had
unique management styles. Bridgewater has often been called the Apple of the
investment world—but to be clear, I didn’t think that Bridgewater or I held a
candle to Apple and Jobs.
Isaacson’s book and the article pointed to other parallels in our backgrounds,
goals, and approaches to shaping—for example, we were both rebellious,
independent thinkers who worked relentlessly for innovation and excellence; we
were both meditators who wanted to “put a dent in the universe”; and we were
both notoriously tough on people. Of course, there were important differences
too. I wished Jobs had shared the principles he had used to achieve his goals.
I wasn’t just interested in Jobs and his principles; I wanted to know about the
qualities and principles of all shapers, so I could better understand the likenesses
and differences between them and form an archetype of the typical shaper. I had
followed that approach for understanding everything; for example, I had made
an exhaustive study of recessions so that I could form a timeless picture of an
archetypal recession and then understand the differences among them. I did that
for all economic and market movements and was inclined to do it for just about
everything, because this approach helps me understand how things work. So it
made sense I’d do that to understand shapers too.
I started by exploring the qualities of Jobs and other shapers with Isaacson, at
first in a private conversation in his office, and later at a public forum at
Bridgewater. Since Isaacson had also written biographies of Albert Einstein and
Ben Franklin—two other great shapers—I read them and probed him about them
to try to glean what characteristics they had in common.
Then I spoke with proven shapers I knew—Bill Gates, Elon Musk, Reed
Hastings, Muhammad Yunus, Geoffrey Canada, Jack Dorsey (of Twitter), David
Kelley (of IDEO), and more. They had all visualized remarkable concepts and
built organizations to actualize them, and done that repeatedly and over long
periods of time. I asked them to take an hour’s worth of personality assessments
to discover their values, abilities, and approaches. While not perfect, these
assessments have been invaluable. (In fact, I have been adapting and refining
them to help us in our recruiting and management.) The answers these shapers
provided to the standardized questions gave me objective and statistically
measurable evidence about their similarities and differences.
It turns out they have a lot in common. They are all independent thinkers who
do not let anything or anyone stand in the way of achieving their audacious
goals. They have very strong mental maps of how things should be done, and at
the same time a willingness to test those mental maps in the world of reality and
change the ways they do things to make them work better. They are extremely
resilient, because their need to achieve what they envision is stronger than the
pain they experience as they struggle to achieve it. Perhaps most interesting, they
have a wider range of vision than most people, either because they have that
vision themselves or because they know how to get it from others who can see
what they can’t. All are able to see both big pictures and granular details (and
levels in between) and synthesize the perspectives they gain at those different
levels, whereas most people see just one or the other. They are simultaneously
creative, systematic, and practical. They are assertive and open-minded at the
same time. Above all, they are passionate about what they are doing, intolerant
of people who work for them who aren’t excellent at what they do, and want to
have a big, beneficial impact on the world.
Take Elon Musk. When he had just come out with the Tesla and showed me
his own car for the first time, he had as much to say about the key fob that
opened the doors as he did about his overarching vision for how Tesla fits into
the broader future of transportation and how impor-tant that is to our planet.
Later on, when I asked him how he came to start his company SpaceX, the
audacity of his answer startled me.
“For a long time,” he answered, “I’ve thought that it’s inevitable that
something bad is going to happen on a planetary scale—a plague, a meteor—that
will require humanity to start over somewhere else, like Mars. One day I went to
the NASA website to see what progress they were making on their Mars
program, and I realized that they weren’t even thinking about going there
anytime soon.
“I had gotten $180 million when my partners and I sold PayPal,” he
continued, “and it occurred to me that if I spent $90 million and used it to
acquire some ICBMs from the former USSR and sent one to Mars, I could
inspire the exploration of Mars.”
When I asked him about his background in rocketry, he told me he didn’t
have one. “I just started reading books,” he said. That’s how shapers think and
act.
At times, their extreme determination to achieve their goals can make them
appear abrasive or inconsiderate, which was reflected in their test results.
Nothing is ever good enough, and they experience the gap between what is and
what could be as both a tragedy and a source of unending motivation. No one
can stand in the way of their achieving what they’re going after. On one of the
personality assessments there is a category they all ranked low on called
“Concern for Others.” But that doesn’t mean quite what it sounds like.
Consider Muhammad Yunus, for example. A great philanthropist, he has
devoted his life to helping others. He received the Nobel Peace Prize for
pioneering the ideas of microcredit and microfinance and has won the
Congressional Gold Medal, the Presidential Medal of Freedom, the Gandhi
Peace Prize, and more. Yet he tested low on “Concern for Others.” Geoffrey
Canada, who has devoted most of his adult life to taking care of all the
disadvantaged children in a hundred-square-block area of New York’s Harlem,
also tested low on “Concern for Others.” Bill Gates, who is devoting most of his
wealth and energy to saving and improving lives, tested low as well. Obviously
Yunus, Canada, and Gates care deeply about other people, yet the personality
tests they took rated them low. Why was that? In speaking with them and
reviewing the questions that led to these ratings, it became clear: When faced
with a choice between achieving their goal or pleasing (or not disappointing)
others, they would choose achieving their goal every time.
Through this investigative process, I learned that there are distinctly different
types of shapers. The most important difference lies in whether their shaping
comes in the form of inventing, managing, or both. For example, while Einstein
shaped by inventing, he didn’t have to manage, and while Jack Welch (who ran
GE) and Lou Gerstner (who ran IBM) were great managers/leaders of people,
they didn’t have to be as inventive. The rarest cases were people like Jobs,
Musk, Gates, and Bezos, who were inventive visionaries and managed big
organizations to build those visions out.
There are a lot of people who look like shapers, in that they came up with a
great idea and got it to the point where they could sell it for a lot of money, but
did not shape consistently. Silicon Valley has many of these types; perhaps they
should be called “inventors.” I also saw that there were wonderful leaders of
organizations who weren’t classic shapers, in that they didn’t come up with the
original visions and build them out; rather, they entered existing organizations
and led them well. Only true shapers consistently move from one success to
another and sustain success over decades, and those are the people I want to
bring to Bridgewater.
My examination of shapers and my reflections on my own qualities made
clear to me that nobody sees the full range of what they need to see in order to be
exceptionally successful, though some see a wider range than others. Those that
do best both see a wide range themselves while triangulating well with other
brilliant people who see things in different, complementary ways.
This realization has been important in making my transition out of
management go well. While in the past I would encounter problems, figure out
their causes, and design my own ways to get around them, others who think
differently than I do will make different diagnoses and designs. My job as
mentor was to help them be successful at that.
This exercise reminded me that there are far fewer types of people in the
world than there are people and far fewer different types of situations than there
are situations, so matching the right types of people to the right types of
situations is key.
Because Gates and Jobs had recently left Microsoft and Apple, I watched
their former organizations closely to help me better understand how I could help
prepare Bridgewater to thrive without me. Certainly the most notable difference
between them and Bridgewater was in our cultures—how we use the idea
meritocracy of radical truth and radical transparency to bring problems and
weaknesses to the surface to prompt forthright dealing with them.
SYSTEMIZING OUR IDEA MERITOCRACY
The more I did the research on people, the clearer it became that there are
different types of people and that, by and large, the same types of people in the
same types of circumstances are going to produce the same types of results. Said
differently, by knowing what someone is like we can have a pretty good idea of
what we can expect from them. So I was more motivated than ever to continue
gathering lots of data on what people are like to build pointillist pictures of them
to help us match people to responsibilities well. Doing this in an evidence-based
way would enhance the idea-meritocratic process of aligning people’s
responsibilities with their merits.
While this all seemed so clear and commonsensical to me, it was much harder
to achieve in practice. About a year into my transition, I saw that many new
managers (and some older ones) still couldn’t see the patterns of people’s
behaviors through time (in other words, they couldn’t connect the dots between
what people are like and the outcomes they produce). Their reluctance to probe
hard to get at what people are like was making things more difficult.
But then I had a breakthrough, which grew out of an observation that the
challenges we were having with making management decisions didn’t exist in
our investment decision making. I realized that, by using big data analytics and
other algorithms, our computers could connect those dots more efficiently than
any of us could, just as they had helped us make connections in the markets.
These systems also didn’t have personal biases and emotional barriers to
overcome, so those being analyzed couldn’t be offended by the data-driven
conclusions the computers were coming up with. In fact, they could look at the
data and algorithms, assess them for themselves, and suggest changes if they
wanted. We were like scientists trying to develop tests and algorithms for
analyzing ourselves objectively.
On November 10, 2012, I shared my thoughts with the Management
Committee in an email. Its subject line was “The Path Out: Systemizing Good
Management”:
It is now clear to me that the main difference behind why the investment
management part of Bridgewater is likely to continue to do well and most of
the other parts of Bridgewater are unlikely to do as well (if we don’t change
how we are operating) is that the decision-making processes for investment
management have been so systemized that it’s hard for people to screw them
up (because they are largely following the systems’ instructions) while the
other areas of Bridgewater are much more dependent on the quality of the
people and their decision making.
Think about that. Imagine how Bridgewater’s investment decision making
would work if it operated the same as Bridgewater’s management decision
making (i.e., dependent on the people we hired and how they collectively
made decisions in their own ways). It would be a mess.
The way the investment decision-making process works is that a small
group of investment managers who created these systems see the systems’
conclusions and the reasoning of the systems while we make our own
conclusions and explore our reasoning on our own. . . . The machine does
most of the work and we interact with it in a quality way. . . . [And] we are
not dependent on much more faulty people.
Think about how different management is. While we have principles, we
don’t have decision-making systems.
In other words, I believe that the investment decision-making process is
effective because the investment principles have been put into decision rules
that make decisions that people then follow while the management decisionmaking process is less effective because the management principles have not
been put into decision rules that people can follow to make management
decisions.
It doesn’t have to be that way. Having built the investment systems (with
the help of others) and knowing about both investment decision making and
management decision making, I am confident that it can be the same. The
only questions are whether it can happen fast enough and what will happen
in the meantime.
I am working with Greg (and others) to develop these management
systems in the same way I worked with Greg and others (Bob, etc.) on the
investment systems. You are seeing this happen via the development of the
Baseball Cards, Dot Collector, Pain Button, testing, job specing, etc.
Because I have a limited time to do this, we need to move fast. At the same
time we will have to fight the battles in the trenches, with hand-to-hand
combat, to clean out those who are incapable and bring in or promote those
who are excellent.
One of the great things about algorithmic decision making is that it focuses
people on cause-effect relationships and, in that way, helps foster a real idea
meritocracy. When everyone can see the criteria the algorithms use and have a
hand in developing them, they can all agree that the system is fair and trust the
computer to look at the evidence, make the right assessments about people, and
assign them the right authorities. The algorithms are essentially principles in
action on a continuous basis.
While our management system has a long way to go before it is as well
automated as our investment system, the tools it has made possible, especially
the “Dot Collector” (an app that gathers information about people in real time
described in detail in the Work Principles), have already made an incredible
difference in the way we work.
All these tools reinforce good habits and good thinking. The good habits
come from thinking repeatedly in a principled way, like learning to speak a
language. The good thinking comes from exploring the reasoning behind the
principles.
The ultimate goal of all this was to help the people I cared about be more
successful without me, which was becoming increasingly pressing as life’s
milestones continued to remind me of my stage in life. For example, I became a
grandfather with the birth of Christopher Dalio on May 31, 2013. And in the
summer of 2013, I had a serious health scare that turned out to be nothing but
reminded me of my mortality. At the same time, I still loved playing the
markets, which I plan to do until I die, making me even more eager to speed the
transition from the second to the third phase of my life.
ANTICIPATING THE EUROPEAN DEBT CRISIS
Beginning in 2010, my Bridgewater colleagues and I began to see the emergence
of a debt crisis in Europe. We had looked at how much debt had to be sold and
how much could be bought for a number of countries and determined that many
Southern European nations were likely to come up short. The resulting crisis
could be as bad as or worse than the one in 2008–09.
As in 1980 and 2008, while our calculations clearly pointed to a debt crisis
ahead, I knew that I could be wrong. Because it would be a big deal if I was
right, I wanted to discuss what I was seeing with top policymakers both to alert
them and to have them correct me if they saw things differently. I encountered
the same sort of resistance without good explanations that I had encountered in
Washington in 2008, only this time in Europe. Things were stable at the time,
and though I knew there was no reason to believe they would stay that way, most
of the people I spoke to weren’t ready to listen to my reasoning. I remember a
meeting I had with the head of the International Monetary Fund when we were
still in the calm before the storm. He doubted my seemingly crazy conclusions,
and he wasn’t interested in going through the numbers.
Just as U.S. policymakers had before 2008, the Europeans did not fear what
they hadn’t experienced before. Because things were good at the time and the
picture I was painting was worse than anything they’d experienced in their
lifetimes, they found what I was saying implausible. They also didn’t possess a
granular understanding of who the borrowers and lenders were and how their
abilities to borrow and lend would change with changing market conditions.
Their understandings of how markets and economies work were oversimplified,
like those of academics. For example, they looked at investors as a single thing
they called “the market,” rather than an amalgam of different players who
bought and sold for different reasons. When the markets did badly, they wanted
to do things that increased confidence, figuring that if they built confidence the
money would come and the problems would disappear. They didn’t see that
whether they were confident or not, specific buyers didn’t have enough money
and credit to buy all the debt that had to be sold.
Just as all human bodies work in essentially the same way, so do the
economic machines in different countries. And just as physical diseases infect
people without regard to nationality, so do economic diseases. So, while the
policymakers were at first skeptical, I approached my conversations with them
by looking at the physiology of the case at hand. I would diagnose the economic
disease they were suffering from, and show them how its symptoms progress by
referencing prior analogous cases. Then I’d explain the best practices for treating
the disease at its different stages. We would have high-quality back-and-forths
about the linkages and the evidence.
Yet even when I did succeed in helping them see the linkages, the political
decision-making systems they had to work within were dysfunctional. Not only
did they have to decide what they would do as individual countries, the nineteen
countries of the European Union had to agree with each other before they could
act—in many cases unanimously. There was often no clear way of resolving
disagreements, which was a big problem because what needed to be done
(printing money) was objectionable to German economic conservatives. As a
result, crises would intensify to breaking points while Europe’s leaders grappled
in long closed-door meetings. Those power struggles tested the nerves of
everyone involved. I can’t possibly convey the amount of bad behavior these
policymakers had to endure for the benefit of the people they represented.
For example, in January 2011, a few weeks after he’d been appointed
minister of economy and competitiveness by Spain’s new president, I met Luis
de Guindos, a man I learned to admire for his forthrightness, intelligence, and
heroic willingness to sacrifice himself for his country’s well-being. The old
government in Spain had been thrown out and the new government took office
as Spanish banks were about to collapse. The new Spanish policymakers were
immediately forced to haggle with representatives from the IMF, the European
Union, and the European Central Bank (the “Troika” as it was called). They did
this into the wee hours of the morning and at the end were required to sign a loan
agreement that essentially handed over control of their banking system to the
Troika in exchange for the financial support they desperately needed.
My meeting with Minister de Guindos took place the morning after the first
and most difficult of these negotiations. With bloodshot eyes but a very alert
mind, he patiently and forthrightly answered all my difficult questions and
shared his thoughts about what reforms Spain should undertake to deal with their
problems. During the next couple of years, over considerable objections, he and
his government pushed these controversial reforms through. He never got the
praise he deserved, but he didn’t care because his satisfaction came from seeing
the results he produced. To me, that is a hero.
As time passed, the European debtor countries fell into deeper depressions.
This led Mario Draghi, the president of the European Central Bank, to make the
bold decision to buy bonds in September 2012. This move averted the imminent
debt crisis, saved the euro, and, as it would turn out, made a lot of money for the
ECB. But it failed to immediately stimulate credit and economic growth in the
countries that were in depression. Inflation, which the ECB was mandated to get
to about 2 percent, was below that target and falling. While the ECB had offered
loans on attractive terms to banks in an attempt to solve this issue, banks weren’t
taking them up on the offer sufficiently to make a difference. I believed that
things would continue to worsen unless the ECB “printed money” and pushed it
into the system by buying more bonds. The move toward quantitative easing
appeared obvious and necessary to me, so I visited Draghi and the ECB’s
executive board to share my concerns.
At the meeting, I told them why this approach would not be inflationary
(because it is the level of spending, which is money plus credit, and not just the
amount of money, that drives spending and inflation). I focused on how the
economic machine works because I felt that if we could agree on that—most
importantly, how buying bonds moves money through the system—we could
agree on its impacts on inflation and economic growth. In that meeting, and in
all such meetings, I shared our calculations as well as the important cause-effect
relationships as I saw them, so that together we could assess whether the
conclusions made sense.
A major impediment to this action was that there is no single bond market for
the entire Eurozone, and the ECB, like most central banks, isn’t supposed to
favor one area/country over another. Given those conditions, I shared my theory
for how the ECB could do quantitative easing without breaking its rules by
buying bonds proportionately across every member country, even though
Germany didn’t need or want the easing that such purchases would bring them.
(The German economy was doing relatively well and inflation fears were
beginning to emerge there.)
In the course of those eighteen months, I met with several top European
economic policymakers, perhaps most importantly German finance minister
Wolfgang Schäuble, whom I judged to be exceptionally thoughtful and selfless. I
also saw how politics within Germany and Europe worked.9 When push came to
shove, the ECB would have to do what was best for Europe, which was to print
the money and buy the bonds in the way I had suggested. Doing that was
consistent with the ECB’s mandate, and the Southern European debtor countries
had the votes to allow it to do that, so I figured that it would be the Germans
who would get overruled and face the decision to leave the Eurozone, which
they would ultimately not do because their leaders had a strong commitment to
the Eurozone with Germany as part of it.
Draghi finally announced the move in January 2015. It had a great effect and
created a precedent that would allow more quantitative easings in the future if
they were needed. The market reaction was very positive. On the day of
Draghi’s announcement European equities were up a percent and a half,
government bond yields fell across the major European economies, and the euro
fell 2 percent against the dollar (which helped stimulate the economy). These
moves continued over the following months, stimulating European economies,
supporting a pickup in growth, and reversing the decline in inflation.
The ECB’s decision was obviously the right thing to do, for reasons that were
relatively simple. But seeing how controversial its move was, it occurred to me
that the world needed a simple explanation of how the economic machine works,
because if everyone understood the basics, then economic policymakers would
be able to do the right things a lot faster and with less angst in the future. That
led me to make a thirty-minute video, How the Economic Machine Works, which
I released in 2013. Besides explaining how the economy works it provides a
template that helps people assess their economies and gives them guidance about
what to do and what to expect during a crisis. It had a much bigger impact than I
expected, as it was watched by more than five million people in eight languages.
A number of policymakers told me in private that they found it helpful for their
own understanding, for dealing with their constituents, and for finding better
paths forward. This was very rewarding to me.
From my contacts with policymakers in a number of countries I learned quite
a bit about how international relations really works. It is quite different from
what most people imagine. Countries behave in a more self-interested and less
considerate way than what most of us would consider appropriate for
individuals. When countries negotiate with one another, they typically operate as
if they are opponents in a chess match or merchants in a bazaar in which
maximizing one’s own benefit is the sole objective. Smart leaders know their
own countries’ vulnerabilities, take advantage of others’ vulnerabilities, and
expect the other countries’ leaders to do the same.
Most people who haven’t had direct contact with the leadership of their own
and other countries form their views based on what they learn in the media, and
become quite naive and inappropriately opinionated as a result. That’s because
dramatic stories and gossip draw more readers and viewers than does clinical
objectivity. Also, in some cases “journalists” have their own ideological biases
that they are trying to advance. As a result, most people who see the world
through the lens of the media tend to look for who is good and who is evil rather
than what the vested interests and relative powers are and how they are being
played out. For example, people tend to embrace stories about how their own
country is moral and the rival country is not, when most of the time these
countries have different interests that they are trying to maximize. The best
behaviors one can hope for come from leaders who can weigh the benefits of
cooperation, and who have long enough time frames that they can see how the
gifts they give this year may bring them benefits in the future.
These conflicts of vested interests don’t just play out internationally; it can
also be nasty within countries. Finding out what’s true and trying to do what’s in
everyone’s best interests is rare, though most policymakers pretend that’s what
they’re doing. More typically, they act in support of their constituents’ interests.
For example, representatives of those with greater income will say higher taxes
stifle growth while representatives of those with less income will say the
opposite. It’s hard to get everyone to even try to look at the whole picture
objectively, let alone to operate in the interests of the whole.
Nonetheless, I came to respect most of the policymakers I worked with and to
feel sorry for them because of the terrible positions they were in. Most are highly
principled people who are forced to operate in unprincipled environments. The
job of a policymaker is challenging under the best of circumstances, and it’s
almost impossible during a crisis. The politics are horrendous and distortions and
outright misinformation from the media make things worse. A number of the
policymakers I met—including Draghi, de Guindos, Schäuble, Bernanke,
Geithner, Summers, and many others—were real heroes, meaning that they put
others and the mission they committed to above themselves. Unfortunately, most
policymakers enter their careers as idealists and leave disillusioned.
One of those heroes I have been fortunate enough to learn from and, I hope,
help is China’s Wang Qishan, who has been a remarkable force for good for
decades. To explain what he is like and the journey that took him to the top of
China’s leadership would take more of this book than I can spare. In brief, Wang
is a historian, a very high-level thinker, and a very practical man. I have rarely
known a person to be both extremely wise and extremely practical. A leading
shaper of the Chinese economy for decades who is also responsible for
eliminating corruption, he is known to be a no-nonsense man who can be trusted
to get stuff done.
Every time I go to China, we meet for sixty to ninety minutes. We talk about
what’s happening in the world, and how that relates to thousands of years of
history and the never-changing nature of mankind. We discuss a wide range of
other topics as well, ranging from physics to artificial intelligence. We are both
keenly interested in how most everything happens over and over again, the
forces behind those patterns, and the principles that work and don’t work in
dealing with them.
I gave Wang a copy of Joseph Campbell’s great book The Hero with a
Thousand Faces, because he is a classic hero and I thought it might help him. I
also gave him The Lessons of History, a 104-page distillation of the major forces
through history by Will and Ariel Durant, and River Out of Eden by the
insightful Richard Dawkins, which explains how evolution works. He gave me
Georgi Plekhanov’s classic On the Role of the Individual in History. All these
books showed how the same things happened over and over again throughout
history.
Most of my conversations with Wang are at the principle level; he sees the
rhyme of history and puts the particulars we speak of in that context.
“Unattainable goals appeal to heroes,” he once told me. “Capable people are
those who sit there worrying about the future. The unwise are those who worry
about nothing. If conflicts got resolved before they became acute, there wouldn’t
be any heroes.” His advice has helped me in my planning for Bridgewater’s
future. For example, when I asked him about checks and balances of power, he
pointed to Julius Caesar’s overthrow of the Roman Senate and Republic as an
illustration of how important it is to make sure no one person is more powerful
than the system. I took his advice to heart as I set out to improve Bridgewater’s
governance model.
Every time I speak with Wang, I feel like I get closer to cracking the unifying
code that unlocks the laws of the universe. He uses his timeless perspective to
see the present and the likely future more clearly.
Being around such people, especially if I can help them, is thrilling to me.
RETURNING THE BOON
Joseph Campbell’s The Hero with a Thousand Faces, one of the books I gave to
Wang as well as a number of other heroes I know, was introduced to me by my
son Paul in 2014. While I had seen Campbell on television nearly thirty years
earlier and remembered being impressed by him, I hadn’t read his book. In it,
Campbell looks at large numbers of “heroes” from different cultures—some real
and some mythical—and describes their archetypal journeys through life.
Campbell’s description of how heroes become heroes aligned with my thinking
about shapers. And it gave me powerful insights about the heroes I know and the
patterns of my own life.
For Campbell, a “hero” isn’t a perfect person who always gets things right.
Far from it. A hero is someone who “found or achieved or [did] something
beyond the normal range of achievement,” and who “has given his life to
something bigger than himself or other than himself.” I had met a number of
such people throughout my life. What was most interesting about Campbell’s
work was his description of how they got that way. Heroes don’t begin as
heroes; they just become them because of the way one thing leads to another.
The diagram on the following page shows the archetypal hero’s journey.
They typically start out leading ordinary lives in an ordinary world and are
drawn by a “call to adventure.” This leads them down a “road of trials” filled
with battles, temptations, successes, and failures. Along the way, they are helped
by others, often by those who are further along the journey and serve as mentors,
though those who are less far along also help in various ways. They also gain
allies and enemies and learn how to fight, often against convention. Along the
way, they encounter temptations and have clashes and reconciliations with their
fathers and their sons. They overcome their fear of fighting because of their great
determination to achieve what they want, and they gain their “special powers”
(i.e., skills) from both “battles” that test and teach them, and from gifts (such as
advice) that they receive from others. Over time, they both succeed and fail, but
they increasingly succeed more than they fail as they grow stronger and keep
striving for more, which leads to ever-bigger and more challenging battles.
Heroes inevitably experience at least one very big failure (which Campbell
calls an “abyss” or the “belly of the whale” experience) that tests whether they
have the resilience to come back and fight smarter and with more determination.
If they do, they undergo a change (have a “metamorphosis”) in which they
experience the fear that protects them, without losing the aggressiveness that
propels them forward. With triumphs come rewards. Though they don’t realize it
when they are in their battles, the hero’s biggest reward is what Campbell calls
the “boon,” which is the special knowledge about how to succeed that the hero
has earned through his journey.
Joseph Campbell’s Hero’s Journey schema from The Hero with a Thousand Faces (New World Library),
copyright © 2008 by the Joseph Campbell Foundation (jcf.org), used with permission.
Late in life, winning more battles and acquiring more rewards typically
becomes less exciting to heroes than passing along that knowledge to others
—“returning the boon” as Campbell called it. Once the boon is returned, the
hero is free to live and then free to die, or, as I see it, to transition from the
second phase in life to the third phase (in which one is free to savor life until one
passes away).
Reading Campbell, I saw that heroes, like shapers, come in varying sizes—
there are big ones and small ones—that they are real people, and that we all
know some. I also saw that being a hero is typically not all it’s cracked up to be
—they get beat up a lot, and many are attacked, humiliated, or killed even after
they triumph. In fact, it’s hard to see the logic for choosing this hero role, if one
were to choose. But I could see and relate to how a certain type of person would
start and stay on that path.
While Campbell’s description of the hero’s journey captured the essence of
my own journey through life and the journeys of many of the people I call
shapers, “hero” is not a word that I would use to describe myself and I certainly
would not put my own accomplishments on the level of the heroes Campbell
wrote about.10 But learning about the hero’s journey did help me crystallize my
understanding of where I was in my own journey, and what I should do next.
The section on returning the boon spoke to me in a personal way, as though
Campbell knew exactly what I was wrestling with. With the reflections it
prompted, I could see that my life would be over in a relatively short time and
that what I’d leave behind could be more important, last longer, and affect many
more people than just those at Bridgewater and my family. That helped make
clear that I needed to pass along the things I had that could help others beyond
me, most importantly the principles in this book, but also my money.
As the saying goes, “You can’t take it with you.” My need to start thinking
about who should get what wasn’t just because of my age and the time it would
take to do it well; it was also instinctive. Over time, the circle of people and
things I cared about had broadened from just me when I was young, to me and
my family when I became a parent, to my community when I was a bit more
mature, to people beyond my community and the whole environment now.
WRESTLING WITH THE QUESTIONS OF
PHILANTHROPY
My first exposure to “philanthropy”11 occurred back in the late 1990s when I
was approaching fifty. At that time, Matt was sixteen, spoke Mandarin, and
visited a Chinese orphanage to help someone, where he learned that a $500
surgery could save or radically improve some lives. We and our friends gave
him money to help. Then, my friend Paul Tudor Jones taught Matt how to create
a 501(c)(3) foundation and Matt, just a junior in high school, created the China
Care Foundation in 2000. Matt brought our family to the orphanages, so we had
close contact with these special-needs children and fell in love with them. We
also watched Matt struggle to decide which children would live and which
would die because there wasn’t enough money to save them all. Imagine being
faced with the choice between a big night out on the town or saving a child’s
life. That was essentially the choice we constantly faced. This experience led us
to become more involved with philanthropy, so in 2003 we set up our own
foundation to provide support in more organized ways. We wanted to do our
philanthropy together, as a family activity, which has proven to be fabulous.
Figuring out how to best give away money is as complex an undertaking as
figuring out how to make it. Though we now know a lot more about it than we
did when we started, we still don’t always feel capable to make the best
decisions possible, so my family and I are still feeling our way through it. I will
give you a few examples of the questions we have been wrestling with and how
our thinking about them has evolved, starting with the question of how much
money should be saved for my family relative to how much should go to people
and causes that are more distant, yet more desperately in need.
Long before I had a lot of money, I had determined that I wanted my sons to
have only enough to afford excellent health care, excellent education, and an
initial boost to help their careers get started. My perspective was influenced by
my own journey through life, which took me from having nothing to having a
lot. That taught me to struggle well and made me strong. I wanted the same for
the people I loved. So, when I had earned a lot of money, I felt I had plenty of
money to give away to others.
Over time, as we gained experience in trying to help in a number of areas, I
learned how fast money goes and that we didn’t have nearly enough to take care
of everything we cared about. Additionally, when my first grandchild was born,
it prompted me to wonder how many generations I should budget to protect.
Speaking to others in comparable positions, I discovered that even the richest
people feel short of the money they need to do the things they want to do. So I
studied how other families approach the question of how much to set aside for
family and how much to give away at what pace. While our family still has not
answered these questions definitely, I know that I personally will give more than
half of my money to those beyond my family.
Which causes we should donate to was another big question. Barbara’s
biggest passion has been helping students in the most stressed public school
districts in Connecticut, especially those students who are called “disengaged
and disconnected.”12 A study she funded showed that 22 percent of high school
students fall into one of these two categories, which was shocking because most
will probably become adults who will suffer and be burdens on society rather
than flourishing contributors to it. Because she has a lot of direct contact with
these children and their teachers, she understands their needs. When she learned
that 10,000 of them didn’t have winter coats, she felt compelled to provide them.
What she showed me opened my eyes. How can clothing and nutrition be so
severely deficient in this “land of opportunity”? Everyone in our family believes
that equal opportunity, which is one of the most fundamental human rights,
requires equal educational opportunity—and that educational opportunities are
terribly unequal. The economic costs—in the forms of crime and incarceration—
as well as the social costs of not investing in improving these conditions are
immense. While we have felt compelled to help, we’ve discovered it is very
difficult to have a significant impact relative to the size of the problem.
I feel deeply connected to nature, especially the oceans. The oceans are our
world’s greatest asset, covering 72 percent of its surface and comprising 99
percent of its livable space. It thrills me to support scientists who are exploring
the oceans and media showing them in the incredible environments they visit.
I’m on a mission to make clear that ocean exploration is even more important
and exciting than space exploration so that our oceans get more support and will
be more sensibly managed. To add to my excitement, my son Mark is a wildlife
filmmaker who shares my passion, so we get to pursue it together.
Matt’s passion is to bring inexpensive, effective computing to the developing
world as a way of expanding and improving education and health care. Paul’s
passion is mental health and his wife’s is fighting climate change. Devon is more
focused on his career than on philanthropy now, but his wife cares deeply about
animal welfare. Our family continues to support special-needs children in China,
as well as an institute that teaches best practices to Chinese philanthropists. We
also support the teaching of meditation to children in stressful environments and
to veterans with PTSD, cutting-edge heart research, microfinance and other
social enterprises, and much more.
We view our donations as investments and want to make sure that we have
high philanthropic returns on our money. So another big question we wrestle
with is how to measure those returns. It’s much easier to measure efficiency in a
business by seeing how much its revenue exceeds its cost. Because of this, we
developed an attraction to sustainable social enterprises. Still, I saw that so many
philanthropic investments could pay off economically as well as socially, and it
tormented me that our society passes them up.
We also wrestled with how big our organization should be and what
governance controls we should have in order to ensure the quality of our
philanthropic decision making. I approached these decisions the same way I
explain in Work Principles—by creating formalized principles and policies for
our decision making. For example, because we are bombarded with more
requests for grants than we can intelligently look at, I mandated a policy not to
review unsolicited requests so our staff has the time to sort through the areas we
want to be focused on. We are continuously improving all our principles and
policies, and I dream about building decision-making algorithms for our
philanthropic efforts, though that’s beyond my reach at the moment.
As you might have guessed, we also seek advice from the most experienced
and respected people possible. Bill Gates and the people we met through our
participation in his, Melinda Gates’s, and Warren Buffett’s Giving Pledge have
been enlightening. Others such as Muhammad Yunus, Paul Jones, Jeff Skoll, the
Omidyar folks, and the people at TED have been very helpful. The most
important thing we’ve learned is that there’s no one right way to do
philanthropy, though there are plenty of wrong ways.
Giving away the money that I acquired during my lifetime—and doing that
well—has been a joy, a challenge, and the appropriate thing to do at this stage in
my life.
BRIDGEWATER TURNS FORTY
In June 2015, Bridgewater marked its fortieth anniversary, an amazing milestone
we celebrated by throwing a big party. We had a lot to celebrate, since by most
measures no firm in our industry had been as successful.13 Key people who had
been a part of our journey from its outset and throughout our forty years got up
to speak. Each of them described the evolution of the company through their
eyes—how some things had changed over the years while others had stayed the
same, most importantly, our culture of striving for excellence in work and
excellence in relationships by being radically truthful and radically transparent
with each other. They recounted how we uniquely and repeatedly tried new
things, failed, learned from our failures, improved, and tried again, doing that
over and over in an upward spiral. When it was my turn to speak, I wanted to
convey what I had always tried to give the people at Bridgewater, and what I
wanted them to have in the future without me:
A community in which you always have the right and obligation to make
sense of things and a process for working yourselves through disagreements
—i.e., a real, functioning idea meritocracy. I want you to think, not follow—
while recognizing that you can be wrong and that you have weaknesses—and
I want to help you get the most likely best answers, even if you personally
don’t believe that they’re the best answers. I want to give you radical open-
mindedness and an idea meritocracy that will take you from being trapped in
your own heads to having access to the best minds in the world to help you
make the best decisions for you and for our community. I want to help you all
struggle well and evolve to get the most out of life.
Though there were still important things that had to be done, at the time I
thought that we were wrapping up my transition nicely. I had no idea how
difficult the next year would be.
9 In Germany politics are like everywhere else in that there are opposing forces that struggle with each
other and decisions are made via a mix of power and negotiation. This makes it desirable to know who has
what power and is willing to negotiate what. What makes Germany different is the amount of attention it
pays to legal technicalities.
10 I want to be clear that I don’t believe that those who are “heroes” or “shapers” are either better people or
are on better paths. It’s perfectly sensible to not have any desire to go on such a journey. I believe that
what’s most important is to know one’s own nature and operate consistently with it.
11 The word “philanthropy” doesn’t sit well with me in describing what we are doing. What we are doing is
helping out with what we care about because of the joy it gives us—like the joy one gets from helping a
friend. To my ear, “philanthropy” has taken on a meaning that sounds more official. For example, some
people have come to judge whether something is philanthropic by whether it is consistent with what tax law
determines is philanthropic. When we approach our philanthropy, we just see people and things that we are
excited about helping.
12 A disengaged student is one who attends school but doesn’t engage in doing the work. A disconnected
student is one who doesn’t attend school and the system has lost track of.
13 That January, we’d launched our first new product in more than a decade, a fund we called “Optimal
Porfolio,” which combined alphas and betas in ways uniquely suited for a global macro environment in
which interest rates were near zero. The launch was a big success, the largest in the history of the hedge
fund industry.
CHAPTER 7
MY LAST YEAR AND MY GREATEST CHALLENGE:
2016–2017
While even before that fortieth anniversary we had all been aware that our
transition wasn’t going as smoothly as we’d hoped, in the months that followed
our problems came to a head in ways that caught us off guard. While the
investment part of Bridgewater was better than ever, other parts of the business,
like the technology and recruiting areas, were slipping.
I was no longer CEO, so it was not my job to manage the company. As
chairman, my job was to oversee the CEOs, to make sure that they were
managing it well. And Greg Jensen and Eileen Murray, the CEOs at the time,
were clearly overstretched. We all agreed that the company wasn’t being
managed adequately, but we disagreed on what to do about it. Disagreements
like these were expected, as we always want everyone to think independently
and argue for what they view as best. That is why we have principles and
processes for resolving them.
So, over a period of several weeks, we exchanged our views. Then key parties
presented their perspectives and recommendations to members of our
Management Committee and our Stakeholders Committee (which is essentially
the Bridgewater board), who considered the alternative paths and ultimately
voted on them. The most important decision that came out of that process was
announced in March 2016: Greg would step out of his co-CEO role so that he
could focus all his attention on his co-chief investment officer role (which he
handled with Bob Prince and me), and I would temporarily join Eileen as coCEO while we implemented the structural changes needed to allow Bridgewater
to work well without me.
While that wasn’t the outcome any of us had hoped for when I first stepped
out as CEO and passed it on to others, it wasn’t entirely unexpected. Our
struggles had been apparent for some time, and we’d tried different iterations.
We knew that leadership transitions are never easy, and our modus operandi has
always been to try, fail, diagnose, redesign, and try again. That’s what we were
doing. Now was the time for a leadership change.
Still, this particular failure was painful, especially for Greg and me. I realized
that I had handed Greg too heavy a load in expecting him to carry out both the
co-CEO and co-CIO roles. I regret that mistake more than any other I made in
running Bridgewater because it hurt both of us and the company. I had not only
mentored Greg, but he had been like a son to me for nearly twenty years. He and
I both wanted and expected him to run the company. The pain of this failure was
made worse, especially for Greg, by the sensational and inaccurate accounts that
appeared in the media. Story after story portrayed it as a bitter death-match
between two titans rather than what it really was, which was people who loved
Bridgewater working through their disagreements in an idea-meritocratic way.
This was Greg’s going-into-the-abyss experience on his own hero’s journey—
and it was also that for me, and for a number of other leaders of the company—
and not just because it was so painful, but because it led us to a metamorphosis
that improved us a lot.
Greg is twenty-five years younger than me. I often think about where I was at
his age, and how much I’ve learned in the years since. I know Greg will go on to
succeed remarkably in his own way. I was pleased that we both came through
this stronger, and especially pleased that our systems for identifying and
resolving problems had worked as well as they had. While we all had different
perspectives, this case reaffirmed our belief that our collective idea-meritocratic
decision-making process would produce better results than any one of us could
have done alone. It was having such a process, along with our deep relationships,
that kept us together.
I realized again that what I didn’t know was much greater than what I did, in
this case not knowing how to transition out of the founder-leader role. So I
reached out to some of the greatest experts I could speak with for advice.
Perhaps the best advice we received came from management expert Jim Collins,
who told us that “to transition well, there are only two things that you need to
do: Put capable CEOs in place and have a capable governance system to replace
the CEOs if they’re not capable.” That was what I had failed to do and what I
now had a second shot at doing right. So I began to think about governance in a
way that I never had before.
Simply put, governance is the system of checks and balances ensuring that an
organization will be stronger than whoever happens to be leading it at any one
time. Because I was a founder-entrepreneur, I had run Bridgewater for thirty-five
years with no formal rules to check and balance me (though I had created an
informal governance system by having me report to our Management Committee
as a check on my decision making).
While that informal system had worked for me, it could not work well
without me. Clearly, we needed to build a new governance system that would
allow Bridgewater to retain its unique way of being and its uncompromising
standards no matter who was in charge—and build it to be resilient enough to
change the company’s management if that was required. I went on to do that
with the help of others, and we are doing that still.
I had learned that it’s wrong to assume either that a person in one role will be
successful in another role or that the ways one person operates will work well for
another. This difficult year also taught me a lot about the people around me,
especially David McCormick and Eileen Murray, who showed their
commitments to our shared mission, as numerous other people did. There were
some failures that we would have rather not had, but that was to be expected,
given our unique culture of trial and error and learning from mistakes. Thanks to
the changes we put into place, I was able to step out of my temporary stint as
CEO after one year, in April 2017.
As I write these words in 2017, I view this year as the final one in my
transition from the second phase of my life to the third, when I will have finished
passing along the knowledge I have gathered along the way, and, as Joseph
Campbell described it, I will be free to live and free to die. But right now I’m not
thinking about the dying part; I’m thinking about how to live freely, and I’m
excited about it.
CHAPTER 8
LOOKING BACK FROM A HIGHER LEVEL
As I look back on my experiences, it’s interesting to reflect on how my
perspectives have changed.
When I started out, each and every twist and turn I encountered, whether in
the markets or in my life in general, looked really big and dramatic up close, like
unique life-or-death experiences that were coming at me fast.
With time and experience, I came to see each encounter as “another one of
those” that I could approach more calmly and analytically, like a biologist might
approach an encounter with a threatening creature in the jungle: first identifying
its species and then, drawing on his prior knowledge about its expected
behaviors, reacting appropriately. When I was faced with types of situations I
had encountered before, I drew on the principles I had learned for dealing with
them. But when I ran into ones I hadn’t seen before, I would be painfully
surprised. Studying all those painful first-time encounters, I learned that even if
they hadn’t happened to me, most of them had happened to other people in other
times and places, which gave me a healthy respect for history, a hunger to have a
universal understanding of how reality works, and the desire to build timeless
and universal principles for dealing with it.
Watching the same things happen again and again, I began to see reality as a
gorgeous perpetual motion machine, in which causes become effects that
become causes of new effects, and so on. I realized that reality was, if not
perfect, at least what we are given to deal with, so that any problems or
frustrations I had with it were more productively directed to dealing with them
effectively than complaining about them. I came to understand that my
encounters were tests of my character and creativity. Over time, I came to
appreciate what a tiny and short-lived part of that remarkable system I am, and
how it’s both good for me and good for the system for me to know how to
interact with it well.
In gaining this perspective, I began to experience painful moments in a
radically different way. Instead of feeling frustrated or overwhelmed, I saw pain
as nature’s reminder that there is something important for me to learn.
Encountering pains and figuring out the lessons they were trying to give me
became sort of a game to me. The more I played it, the better I got at it, the less
painful those situations became, and the more rewarding the process of
reflecting, developing principles, and then getting rewards for using those
principles became. I learned to love my struggles, which I suppose is a healthy
perspective to have, like learning to love exercising (which I haven’t managed to
do yet).
In my early years, I looked up to extraordinarily successful people, thinking
that they were successful because they were extraordinary. After I got to know
such people personally, I realized that all of them—like me, like everyone—
make mistakes, struggle with their weaknesses, and don’t feel that they are
particularly special or great. They are no happier than the rest of us, and they
struggle just as much or more than average folks. Even after they surpass their
wildest dreams, they still experience more struggle than glory. This has certainly
been true for me. While I surpassed my wildest dreams decades ago, I am still
struggling today. In time, I realized that the satisfaction of success doesn’t come
from achieving your goals, but from struggling well. To understand what I mean,
imagine your greatest goal, whatever it is—making a ton of money, winning an
Academy Award, running a great organization, being great at a sport. Now
imagine instantaneously achieving it. You’d be happy at first, but not for long.
You would soon find yourself needing something else to struggle for. Just look
at people who attain their dreams early—the child star, the lottery winner, the
professional athlete who peaks early. They typically don’t end up happy unless
they get excited about something else bigger and better to struggle for. Since life
brings both ups and downs, struggling well doesn’t just make your ups better; it
makes your downs less bad. I’m still struggling and I will until I die, because
even if I try to avoid the struggles, they will find me.
Thanks to all that struggling and learning, I have done everything I wanted to
do, gone everywhere I wanted to go, met whomever I wanted to meet, gotten
everything I wanted to own, had a career that has been enthralling, and, most
rewardingly, had many wonderful relationships. I have experienced the full
range, from having nothing to having an enormous amount, and from being a
nobody to being a somebody, so I know the differences. While I experienced
them going from the bottom up rather than from the top down (which was
preferable and probably influenced my perspective), my assessment is that the
incremental benefits of having a lot and being on top are not nearly as great as
most people think. Having the basics—a good bed to sleep in, good
relationships, good food, and good sex—is most important, and those things
don’t get much better when you have a lot of money or much worse when you
have less. And the people one meets at the top aren’t necessarily more special
than those one meets at the bottom or in between.
The marginal benefits of having more fall off pretty quickly. In fact, having a
lot more is worse than having a moderate amount more because it comes with
heavy burdens. Being on top gives you a wider range of options, but it also
requires more of you. Being well-known is probably worse than being
anonymous, all things considered. And while the beneficial impact one can have
on others is great, when you put it in perspective, it is still infinitesimally small.
For all those reasons, I cannot say that having an intense life filled with
accomplishments is better than having a relaxed life filled with savoring, though
I can say that being strong is better than being weak, and that struggling gives
one strength. My nature being what it is, I would not have changed my life, but I
can’t tell you what is best for you. That is for you to choose. What I have seen is
that the happiest people discover their own nature and match their life to it.
Now that my desire to succeed has given way to a desire to help others
succeed, that’s become my current struggle. It’s now clear to me that my
purpose, your purpose, and the purpose of everything else is to evolve and to
contribute to evolution in some small way. I didn’t think about that at the start; I
just went after the things I wanted. But along the way I evolved, and now I am
sharing these principles with you to help you evolve too. I realized that passing
on knowledge is like passing on DNA—it is more important than the individual,
because it lives way beyond the individual’s life. This is my attempt to help you
succeed by passing along to you what I learned about how to struggle well—or,
at the very least, to help you get the most out of each unit of effort you put in.
PRINCIPLES
Good principles are effective ways of dealing
with reality. To learn my own, I spend a lot of
time reflecting. So rather than just giving you
my principles, I will share the reflections
behind them.
I believe that everything that happens comes about because of cause-effect
relationships that repeat and evolve over time. At the big bang, all the laws and
forces of the universe were created and propelled forward, interacting with each
other over time like a complex series of machines that work together: the
structure of galaxies, the makeup of Earth’s geography and ecosystems, our
economies and markets, and each one of us. Individually, we are machines made
up of different machines—our circulatory systems, our nervous systems, and so
on—that produce our thoughts, our dreams, our emotions, and every other aspect
of our distinct personalities. All these machines are evolving together to produce
the reality we encounter every day.
• Look to the patterns of those things that affect you in
order to understand the cause-effect relationships that
drive them and to learn principles for dealing with
them effectively.
By doing this, you will begin to understand how the machinery underlying any
“another one of those” works and develop a mental map for dealing with it. As
your understanding of these relationships grows, the essentials stand out from
the blizzard of things coming at you; you will notice which “one of those” you
are facing and instinctually apply the right principles to help you through it.
Reality, in turn, will send you loud signals about how well your principles are
working by rewarding or punishing you, so you will learn to fine-tune them
accordingly.
Having good principles for dealing with the realities we encounter is the most
important driver of how well we handle them. I’m not saying that all people
have the same encounters. It is certainly the case that different people in
different parts of the world face different challenges. Still, most of our
encounters with reality fall under one category or another and the number of
those categories is not enormous. If you were to write down what type of
encounter you have every time you have one (e.g., the birth of a child, the loss of
a job, a personal disagreement) and compile them in a list, it would probably
total just a few hundred items and only a few of them would be unique to you.
You might want to try this. Not only will you see for yourself if what I’m saying
is true, but you will also start to build a list of the things you need to think about
and have principles for.
Whatever success I’ve had is because of the principles I followed and not
because of anything unique about me, so anyone following these principles can
expect to produce broadly similar results. That said, I don’t want you to follow
my (or anyone’s) principles blindly. I suggest that you think through all the
principles available to you from different sources and put together a collection of
your own that you can turn to whenever reality sends “another one of those”
your way.
Life Principles and Work Principles are organized in outline form at three
different levels so you can skim along the surface or dive in depending on the
amount of time and interest you have.
1 Higher-level principles, which are also the chapter titles,
are preceded by single numbers.
1.1 Mid-level principles are contained within each chapter
and are designated by two numbers: one indicating the
higher-level principle it is under and the other showing
the order in which it appears in the chapter.
a. Sub-principles fall under the mid-level principles and are marked with letters.
All three levels of principles have explanations following them. To give you a
quick overview, I’ve included summaries of principles at the end of Life
Principles and the beginning of Work Principles. I suggest you start with the
higher-level principles and the text explaining them, plus the headings for both
the principles and subprinciples. Life Principles is intended to be read in its
entirety, while Work Principles is meant as more of a reference book.
PART II
LIFE PRINCIPLES
1 Embrace Reality and Deal with It
There is nothing more important than understanding how reality works and how
to deal with it. The state of mind you bring to this process makes all the
difference. I have found it helpful to think of my life as if it were a game in
which each problem I face is a puzzle I need to solve. By solving the puzzle, I
get a gem in the form of a principle that helps me avoid the same sort of problem
in the future. Collecting these gems continually improves my decision making,
so I am able to ascend to higher and higher levels of play in which the game gets
harder and the stakes become ever greater.
All sorts of emotions come to me while I am playing and those emotions can
either help me or hurt me. If I can reconcile my emotions with my logic and only
act when they are aligned, I make better decisions.
Learning how reality works, visualizing the things I want to create, and then
building them out is incredibly exciting to me. Stretching for big goals puts me
in the position of failing and needing to learn and come up with new inventions
in order to move forward. I find it exhilarating being caught up in the feedback
loop of rapid learning—just as a surfer loves riding a wave, even though it
sometimes leads to crashes. Don’t get me wrong, I’m still scared of the crashes
and I still find them painful. But I keep that pain in perspective, knowing that I
will get through these setbacks and that most of my learning will come from
reflecting on them.14 Just as long-distance runners push through pain to
experience the pleasure of “runner’s high,” I have largely gotten past the pain of
my mistake making and instead enjoy the pleasure that comes with learning from
it. I believe that with practice you can change your habits and experience the
same “mistake learner’s high.”
1.1 Be a hyperrealist.
Understanding, accepting, and working with reality is both practical and
beautiful. I have become so much of a hyperrealist that I’ve learned to appreciate
the beauty of all realities, even harsh ones, and have come to despise impractical
idealism.
Don’t get me wrong: I believe in making dreams happen. To me, there’s
nothing better in life than doing that. The pursuit of dreams is what gives life its
flavor. My point is that people who create great things aren’t idle dreamers:
They are totally grounded in reality. Being hyperrealistic will help you choose
your dreams wisely and then achieve them. I have found the following to be
almost always true:
a. Dreams + Reality + Determination = A Successful Life. People who achieve success
and drive progress deeply understand the cause-effect relationships that govern
reality and have principles for using them to get what they want. The converse is
also true: Idealists who are not well grounded in reality create problems, not
progress.
What does a successful life look like? We all have our own deep-seated
needs, so we each have to decide for ourselves what success is. I don’t care
whether you want to be a master of the universe, a couch potato, or anything else
—I really don’t. Some people want to change the world and others want to
operate in simple harmony with it and savor life. Neither is better. Each of us
needs to decide what we value most and choose the paths we take to achieve it.
Take a moment to reflect on where you are on the following scale, which
illustrates an overly simplified choice you should think about. Where would you
put yourself on it?
The question isn’t just how much of each to go after, but how hard to work to
get as much as possible. I wanted crazy amounts of each, was thrilled to work
hard to get as much of them as possible, and found that they could largely be one
and the same and mutually reinforcing. Over time I learned that getting more out
of life wasn’t just a matter of working harder at it. It was much more a matter of
working effectively, because working effectively could increase my capacity by
hundreds of times. I don’t care what you want or how hard you want to work for
it. That’s for you to decide. I’m just trying to pass along to you what has helped
me get the most out of each hour of time and each unit of effort.
Most importantly, I’ve learned that there is no escaping the fact that:
1.2 Truth—or, more precisely, an accurate
understanding of reality—is the essential
foundation for any good outcome.
Most people fight seeing what’s true when it’s not what they want it to be.
That’s bad, because it is more important to understand and deal with the bad
stuff since the good stuff will take care of itself.
Do you agree with that? If not, you are unlikely to benefit from what follows.
If you do agree, let’s build on it.
1.3 Be radically open-minded and radically
transparent.
None of us is born knowing what is true; we either have to discover what’s true
for ourselves or believe and follow others. The key is to know which path will
yield better results.15 I believe that:
a. Radical open-mindedness and radical transparency are invaluable for rapid learning
and effective change. Learning is the product of a continuous real-time feedback
loop in which we make decisions, see their outcomes, and improve our
understanding of reality as a result. Being radically open-minded enhances the
efficiency of those feedback loops, because it makes what you are doing, and
why, so clear to yourself and others that there can’t be any misunderstandings.
The more open-minded you are, the less likely you are to deceive yourself—and
the more likely it is that others will give you honest feedback. If they are
“believable” people (and it’s very important to know who is “believable”16), you
will learn a lot from them.
Being radically transparent and radically open-minded accelerates this
learning process. It can also be difficult because being radically transparent
rather than more guarded exposes one to criticism. It’s natural to fear that. Yet if
you don’t put yourself out there with your radical transparency, you won’t learn.
b. Don’t let fears of what others think of you stand in your way. You must be willing to
do things in the unique ways you think are best—and to open-mindedly reflect
on the feedback that comes inevitably as a result of being that way.
Learning to be radically transparent is like learning to speak in public: While
it’s initially awkward, the more you do it, the more comfortable you will be with
it. This has been true for me. For example, I still instinctively find being as
radically transparent in the ways that I am in this book uncomfortable because I
am exposing personal material to the public that will attract attention and
criticism. Yet I am doing it because I’ve learned that it’s best, and I wouldn’t
feel good about myself if I let my fears stand in the way. In other words, I have
experienced the positive effects of radical transparency for so long that it’s now
uncomfortable for me not to be that way.
Besides giving me the freedom to be me, it has allowed me to understand
others and for them to understand me, which is much more efficient and much
more enjoyable than not having this understanding. Imagine how many fewer
misunderstandings we would have and how much more efficient the world
would be—and how much closer we all would be to knowing what’s true—if
instead of hiding what they think, people shared it openly. I’m not talking about
everyone’s very personal inner secrets; I’m talking about people’s opinions of
each other and of how the world works. As you’ll see, I’ve learned firsthand how
powerful this kind of radical truth and transparency is in improving my decision
making and my relationships. So whenever I’m faced with the choice, my
instinct is to be transparent. I practice it as a discipline and I recommend you do
the same.
c. Embracing radical truth and radical transparency will bring more meaningful work
and more meaningful relationships. My experience, based on watching thousands of
people try this approach, is that with practice the vast majority find it so
rewarding and pleasurable that they have a hard time operating any other way.
This takes practice and changing one’s habits. I have found that it typically
takes about eighteen months, which is how long it takes to change most habits.
1.4 Look to nature to learn how reality works.
All the laws of reality were given to us by nature. Man didn’t create these laws,
but by understanding them we can use them to foster our own evolution and
achieve our goals. For example, our ability to fly or to send cell phone signals
around the world came from understanding and applying the existing rules of
reality—the physical laws or principles that govern the natural world.
While I spend most of my time studying the realities that affect me most
directly—those that drive economies, the markets, and the people I deal with—I
also spend time in nature and can’t help reflecting on how it works by observing,
reading, and speaking with some of the greatest specialists on the subject. I’ve
found it both interesting and valuable to observe which laws we humans have in
common with the rest of nature and which differentiate us. Doing that has had a
big impact on my approach to life.
First of all, I see how cool it is that the brain’s evolution gave us the ability to
reflect on how reality works in this way. Man’s most distinctive quality is our
singular ability to look down on reality from a higher perspective and synthesize
an understanding of it. While other species operate by following their instincts,
man alone can go above himself and look at himself within his circumstances
and within time (including before and after his existence). For example, we can
ponder the ways that nature’s flying machines, swimming machines, and billions
of other machines, from the microscopic to the cosmic, interact with one another
to make up a working whole that evolves through time. This is because the
evolution of the brain gave man a much more developed neocortex, which gives
us the power to think abstractly and logically.
While our higher-level thinking makes us unique among species, it can also
make us uniquely confused. Other species have much simpler and more
straightforward lives, without any of man’s wrestling with what’s good and
what’s bad. In contrast with animals, most people struggle to reconcile their
emotions and their instincts (which come from the animal parts of their brains)
with their reasoning (which comes from parts of the brain more developed in
humans). This struggle causes people to confuse what they want to be true with
what actually is true. Let’s look at this dilemma to try to understand how reality
works.
When trying to understand anything—economies, markets, the weather,
whatever—one can approach the subject with two perspectives:
1. Top down: By trying to find the one code/law that drives them all. For
example, in the case of markets, one could study universal laws like supply
and demand that affect all economies and markets. In the case of species,
one could focus on learning how the genetic code (DNA) works for all
species.
2. Bottom up: By studying each specific case and the codes/laws that are true
for them, for example, the codes or laws particular to the market for wheat
or the DNA sequences that make ducks different from other species.
Seeing things from the top down is the best way to understand ourselves and
the laws of reality within the context of overarching universal laws. That’s not to
say it’s not worth having a bottom-up perspective. In fact, to understand the
world accurately you need both. By taking a bottom-up perspective that looks at
each individual case, we can see how it lines up with our theories about the laws
that we expect to govern it. When they line up, we’re good.
By looking at nature from the top down, we can see that much of what we call
human nature is really animal nature. That’s because the human brain is
programmed with millions of years of genetic learning that we share with other
species. Because we share common roots and common laws, we and other
animals have similar attributes and constraints. For example, the male/female
sexual reproduction process, using two eyes to provide depth perception, and
many other systems are shared by many species in the animal kingdom.
Similarly, our brains have some “animal” parts that are much older in
evolutionary terms than humanity is. These laws that we have in common are the
most overarching ones. They wouldn’t be apparent to us if we just looked at
ourselves.
If you just looked at one species—ducks, for example—to try to understand
the universal laws, you’d fail. Similarly, if you just looked at mankind to
understand the universal laws, you’d fail. Man is just one of ten million species
and just one of the billions of manifestations of the forces that bring together and
take apart atoms through time. Yet most people are like ants focused only on
themselves and their own anthill; they believe the universe revolves around
people and don’t pay attention to the universal laws that are true for all species.
To try to figure out the universal laws of reality and principles for dealing
with it, I’ve found it helpful to try to look at things from nature’s perspective.
While mankind is very intelligent in relation to other species, we have the
intelligence of moss growing on a rock compared to nature as a whole. We are
incapable of designing and building a mosquito, let alone all the species and
most of the other things in the universe. So I start from the premise that nature is
smarter than I am and try to let nature teach me how reality works.
a. Don’t get hung up on your views of how things “should” be because you will miss out
on learning how they really are. It’s important not to let our biases stand in the way
of our objectivity. To get good results, we need to be analytical rather than
emotional.
Whenever I observe something in nature that I (or mankind) think is wrong, I
assume that I’m wrong and try to figure out why what nature is doing makes
sense. That has taught me a lot. It has changed my thinking about 1) what’s good
and what’s bad, 2) what my purpose in life is, and 3) what I should do when
faced with my most important choices. To help explain why, I will give you a
simple example.
When I went to Africa a number of years ago, I saw a pack of hyenas take
down a young wildebeest. My reaction was visceral. I felt empathy for the
wildebeest and thought that what I had witnessed was horrible. But was that
because it was horrible or was it because I am biased to believe it’s horrible
when it is actually wonderful? That got me thinking. Would the world be a better
or worse place if what I’d seen hadn’t occurred? That perspective drove me to
consider the second- and third-order consequences so that I could see that the
world would be worse. I now realize that nature optimizes for the whole, not for
the individual, but most people judge good and bad based only on how it affects
them. What I had seen was the process of nature at work, which is much more
effective at furthering the improvement of the whole than any process man has
ever invented.
Most people call something bad if it is bad for them or bad for those they
empathize with, ignoring the greater good. This tendency extends to groups: One
religion will consider its beliefs good and another religion’s beliefs bad to such
an extent that their members might kill each other in the mutual conviction that
each is doing what’s right. Typically, people’s conflicting beliefs or conflicting
interests make them unable to see things through another’s eyes. That’s not good
and it doesn’t make sense. While I could understand people liking something
that helps them and disliking things that hurt them, it doesn’t make sense to call
something good or bad in an absolute sense based only on how it affects
individuals. To do so would presume that what the individual wants is more
important than the good of the whole. To me, nature seems to define good as
what’s good for the whole and optimizes for it, which is preferable. So I have
come to believe that as a general rule:
b. To be “good” something must operate consistently with the laws of reality and
contribute to the evolution of the whole; that is what is most rewarded. For example, if
you come up with something the world values, you almost can’t help but be
rewarded. Conversely, reality tends to penalize those people, species, and things
that don’t work well and detract from evolution.17
In looking at what is true for everything, I have come to believe that:
c. Evolution is the single greatest force in the universe; it is the only thing that is
permanent and it drives everything.18 Everything from the smallest subatomic
particle to the entire galaxy is evolving. While everything apparently dies or
disappears in time, the truth is that it all just gets reconfigured in evolving forms.
Remember that energy can’t be destroyed—it can only be reconfigured. So the
same stuff is continuously falling apart and coalescing in different forms. The
force behind that is evolution.
For example, the primary purpose of every living thing is to act as a vessel for
the DNA that evolves life through time. The DNA that exists within each
individual came from an eternity ago and will continue to live long after its
individual carriers pass away, in increasingly evolved forms.19
As I thought about evolution, I realized that it exists in other forms than life
and is carried out through other transmission mechanisms than DNA.
Technologies, languages, and everything else evolves. Knowledge, for example,
is like DNA in that it is passed from generation to generation and evolves; its
impact on people over many generations can be as great or greater than that of
the genetic code.
Evolution is good because it is the process of adaptation that generally moves
things toward improvement. All things such as products, organizations, and
human capabilities evolve through time in a similar way. It is simply the process
by which things either adapt and improve or die. To me this evolutionary process
looks like what you see on the right:


Evolution consists of adaptations/inventions that provide spurts of benefits
that decline in value. That painful decline leads either to new adaptations and
new inventions that bring new products, organizations, and human capabilities to
new and higher levels of development (as shown in the top diagram on the
facing page); or decline and death, which looks like the diagram at bottom left.
Think of any product, organization, or person you know and you will see that
this is true. The world is littered with once-great things that deteriorated and
failed; only a rare few have kept reinventing themselves to go on to new heights
of greatness. All machines eventually break down, decompose, and have their
parts recycled to create new machines. That includes us. Sometimes this makes
us sad because we’ve become attached to our machines, but if you look at it
from the higher level, it’s really beautiful to observe how the machine of
evolution works.
From this perspective, we can see that perfection doesn’t exist; it is a goal that
fuels a never-ending process of adaptation. If nature, or anything, were perfect it
wouldn’t be evolving. Organisms, organizations, and individual people are
always highly imperfect but capable of improving. So rather than getting stuck
hiding our mistakes and pretending we’re perfect, it makes sense to find our
imperfections and deal with them. You will either learn valuable lessons from
your mistakes and press on, better equipped to succeed—or you won’t and you
will fail.
As the saying goes:
d. Evolve or die. This evolutionary cycle is not just for people but for countries,
companies, economies—for everything. And it is naturally self-correcting as a
whole, though not necessarily for its parts. For example, if there is too much
supply and waste in a market, prices will go down, companies will go out of
business, and capacity will be reduced until the supply falls in line with the
demand, at which time the cycle will start to move in the opposite direction.
Similarly, if an economy turns bad enough, those responsible for running it will
make the political and policy changes that are needed—or they will not survive,
making room for their replacements to come along. These cycles are continuous
and play out in logical ways—and they tend to be self-reinforcing.

The key is to fail, learn, and improve quickly. If you’re constantly learning
and improving, your evolutionary process will look like the one that’s ascending.
Do it poorly and it will look like what you see on the left, or worse.
I believe that:
1.5 Evolving is life’s greatest accomplishment and its
greatest reward.
It is instinctually that way, which is why most of us feel the pull of it—in other
words, we instinctively want to get better at things and have created and evolved
technology to help us. History has shown that all species will either go extinct or
evolve into other species, though with our limited time window that is hard for
us to see. But we do know that what we call mankind was simply the result of
DNA evolving into a new form about two hundred thousand years ago, and we
know that mankind will certainly either go extinct or evolve into a higher state. I
personally believe there is a good chance man will begin to evolve at an
accelerating pace with the help of man-made technologies that can analyze vast
amounts of data and “think” faster and better than we can. I wonder how many
centuries it will take for us to evolve into a higher-level species that will be
much closer to omniscience than we are now—if we don’t destroy ourselves
first.
One of the great marvels of nature is how the whole system, which is full of
individual organisms acting in their own self-interest and without understanding
or guiding what’s going on, can create a beautifully operating and evolving
whole. While I’m not an expert at this, it seems that it’s because evolution has
produced a) incentives and interactions that lead to individuals pursuing their
own interests and resulting in the advancement of the whole, b) the natural
selection process, and c) rapid experimentation and adaptation.
a. The individual’s incentives must be aligned with the group’s goals.To give you a
quick example of nature creating incentives that lead to individuals pursuing
their own interests that result in the advancement of the whole, look at sex and
natural selection. Nature gave us one hell of an incentive to have sex in the form
of the great pleasure it provides, even though the purpose of having sex is to
contribute to the advancement of the DNA. That way, we individually get what
we want while contributing to the evolution of the whole.
b. Reality is optimizing for the whole—not for you. Contribute to the whole and you
will likely be rewarded. Natural selection leads to better qualities being retained
and passed along (e.g., in better genes, better abilities to nurture others, better
products, etc.). The result is a constant cycle of improvement for the whole.
c. Adaptation through rapid trial and error is invaluable. Natural selection’s trial-anderror process allows improvement without anyone understanding or guiding it.
The same can apply to how we learn. There are at least three kinds of learning
that foster evolution: memory-based learning (storing the information that comes
in through one’s conscious mind so that we can recall it later); subconscious
learning (the knowledge we take away from our experiences that never enters
our conscious minds, though it affects our decision making); and “learning” that
occurs without thinking at all, such as the changes in DNA that encode a
species’ adaptations. I used to think that memory-based, conscious learning was
the most powerful, but I’ve since come to understand that it produces less rapid
progress than experimentation and adaptation. To give you an example of how
nature improves without thinking, just look at the struggle that mankind (with all
its thinking) has experienced in trying to outsmart viruses (which don’t even
have brains). Viruses are like brilliant chess opponents. By evolving quickly
(combining different genetic material across different strains), they keep the
smartest minds in the global health community busy thinking up countermoves
to hold them off. Understanding that is especially helpful in an era when
computers can run large numbers of simulations replicating the evolutionary
process to help us see what works and what doesn’t.
In the next chapter I will describe a process that has helped me, and I believe
can help you, evolve quickly. But first I want to emphasize how important your
perspective is in trying to decide what is important to you and what to go after.
d. Realize that you are simultaneously everything and nothing—and decide what you
want to be. It is a great paradox that individually we are simultaneously
everything and nothing. Through our own eyes, we are everything—e.g., when
we die, the whole world disappears. So to most people (and to other species)
dying is the worst thing possible, and it is of paramount importance that we have
the best life possible. However, when we look down on ourselves through the
eyes of nature we are of absolutely no significance. It is a reality that each one of
us is only one of about seven billion of our species alive today and that our
species is only one of about ten million species on our planet. Earth is just one of
about 100 billion planets in our galaxy, which is just one of about two trillion
galaxies in the universe. And our lifetimes are only about 1/3,000 of humanity’s
existence, which itself is only 1/20,000 of the Earth’s existence. In other words,
we are unbelievably tiny and short-lived and no matter what we accomplish, our
impact will be insignificant. At the same time, we instinctually want to matter
and to evolve, and we can matter a tiny bit—and it’s all those tiny bits that add
up to drive the evolution of the universe.
The question is how we matter and evolve. Do we matter to others (who also
don’t matter in the grand scope of things) or in some greater sense that we will
never actually achieve? Or does it not matter if we matter so we should forget
about the question and just enjoy our lives while they last?
e. What you will be will depend on the perspective you have. Where you go in life will
depend on how you see things and who and what you feel connected to (your
family, your community, your country, mankind, the whole ecosystem,
everything). You will have to decide to what extent you will put the interests of
others above your own, and which others you will choose to do so for. That’s
because you will regularly encounter situations that will force you to make such
choices.
While such decisions might seem too erudite for your taste, you will make them
either consciously or subliminally, and they will be very important.
For me personally, I now find it thrilling to embrace reality, to look down on
myself through nature’s perspective, and to be an infinitesimally small part of
the whole. My instinctual and intellectual goal is simply to evolve and contribute
to evolution in some tiny way while I’m here and while I am what I am. At the
same time, the things I love most—my work and my relationships—are what
motivate me. So, I find how reality and nature work, including how I and
everything will decompose and recompose, beautiful—though emotionally I find
the separation from those I care about difficult to appreciate.
1.6 Understand nature’s practical lessons.
I have found understanding how nature and evolution work helpful in a number
of ways. Most importantly, it has helped me deal with my realities more
effectively and make difficult choices. When I began to look at reality through
the perspective of figuring out how it really works, instead of thinking things
should be different, I realized that most everything that at first seemed “bad” to
me—like rainy days, weaknesses, and even death—was because I held
preconceived notions of what I personally wanted. With time, I learned that my
initial reaction was because I hadn’t put whatever I was reacting to in the context
of the fact that reality is built to optimize for the whole rather than for me.
a. Maximize your evolution. Earlier, I mentioned that the unique abilities of
thinking logically, abstractly, and from a higher level are carried out in structures
located in the neocortex. These parts of the brain are more developed in humans
and allow us to reflect on ourselves and direct our own evolution. Because we
are capable of conscious, memory-based learning, we can evolve further and
faster than any other species, changing not just across generations but within our
own lifetimes.
This constant drive toward learning and improvement makes getting better
innately enjoyable and getting better fast exhilarating. Though most people think
that they are striving to get the things (toys, bigger houses, money, status, etc.)
that will make them happy, for most people those things don’t supply anywhere
near the long-term satisfaction that getting better at something does.20 Once we
get the things we are striving for, we rarely remain satisfied with them. The
things are just the bait. Chasing after them forces us to evolve, and it is the
evolution and not the rewards themselves that matters to us and to those around
us. This means that for most people success is struggling and evolving as
effectively as possible, i.e., learning rapidly about oneself and one’s
environment, and then changing to improve.
It is natural that it should be this way because of the law of diminishing
returns.21 Consider what acquiring money is like. People who earn so much that
they derive little or no marginal gains from it will experience negative
consequences, as with any other form of excess, like gluttony. If they are
intellectually healthy, they will begin seeking something new or seeking new
depths in something old—and they will get stronger in the process. As Freud put
it, “Love and work are the cornerstones of our humanness.”
The work doesn’t necessarily have to be a job, though I believe it’s generally
better if it is a job. It can be any kind of long-term challenge that leads to
personal improvement. As you might have guessed, I believe that the need to
have meaningful work is connected to man’s innate desire to improve. And
relationships are the natural connections to others that make us relevant to each
other and to society more broadly.
b. Remember “no pain, no gain.” Realizing that we innately want to evolve—and
that the other stuff we are going after, while nice, won’t sustain our happiness—
has helped me focus on my goals of evolving and contributing to evolution in
my own infinitely small way. While we don’t like pain, everything that nature
made has a purpose, so nature gave us pain for a purpose. So what is its purpose?
It alerts us and helps direct us.
c. It is a fundamental law of nature that in order to gain strength one has to push one’s
limits, which is painful. As Carl Jung put it, “Man needs difficulties. They are
necessary for health.” Yet most people instinctually avoid pain. This is true
whether we are talking about building the body (e.g., weight lifting) or the mind
(e.g., frustration, mental struggle, embarrassment, shame)—and especially true
when people confront the harsh reality of their own imperfections.
1.7 Pain + Reflection = Progress.
There is no avoiding pain, especially if you’re going after ambitious goals.
Believe it or not, you are lucky to feel that kind of pain if you approach it
correctly, because it is a signal that you need to find solutions so you can
progress. If you can develop a reflexive reaction to psychic pain that causes you
to reflect on it rather than avoid it, it will lead to your rapid learning/evolving.22
After seeing how much more effective it is to face the painful realities that are
caused by your problems, mistakes, and weaknesses, I believe you won’t want to
operate any other way. It’s just a matter of getting in the habit of doing it.
Most people have a tough time reflecting when they are in pain and they pay
attention to other things when the pain passes, so they miss out on the reflections
that provide the lessons. If you can reflect well while you’re in pain (which is
probably too much to ask), great. But if you can remember to reflect after it
passes, that’s valuable too. (I created a Pain Button app to help people do this,
which I describe in the appendix.)
The challenges you face will test and strengthen you. If you’re not failing,
you’re not pushing your limits, and if you’re not pushing your limits, you’re not
maximizing your potential. Though this process of pushing your limits, of
sometimes failing and sometimes breaking through—and deriving benefits from
both your failures and your successes—is not for everyone, if it is for you, it can
be so thrilling that it becomes addictive. Life will inevitably bring you such
moments, and it’ll be up to you to decide whether you want to go back for more.
If you choose to push through this often painful process of personal evolution,
you will naturally “ascend” to higher and higher levels. As you climb above the
blizzard of things that surrounds you, you will realize that they seem bigger than
they really are when you are seeing them up close; that most things in life are
just “another one of those.” The higher you ascend, the more effective you
become at working with reality to shape outcomes toward your goals. What once
seemed impossibly complex becomes simple.
a. Go to the pain rather than avoid it. If you don’t let up on yourself and instead
become comfortable always operating with some level of pain, you will evolve
at a faster pace. That’s just the way it is.
Every time you confront something painful, you are at a potentially important
juncture in your life—you have the opportunity to choose healthy and painful
truth or unhealthy but comfortable delusion. The irony is that if you choose the
healthy route, the pain will soon turn into pleasure. The pain is the signal! Like
switching from not exercising to exercising, developing the habit of embracing
the pain and learning from it will “get you to the other side.”
By “getting to the other side,” I mean that you will become hooked on:
• Identifying, accepting, and learning how to deal with your weaknesses,
• Preferring that the people around you be honest with you rather than keep
their negative thoughts about you to themselves, and
• Being yourself rather than having to pretend to be strong where you are
weak.
b. Embrace tough love. In my own life, what I want to give to people, most
importantly to people I love, is the power to deal with reality to get what they
want. In pursuit of my goal to give them strength, I will often deny them what
they “want” because that will give them the opportunity to struggle so that they
can develop the strength to get what they want on their own. This can be difficult
for people emotionally, even if they understand intellectually that having
difficulties is the exercise they need to grow strong and that just giving them
what they want will weaken them and ultimately lead to them needing more
help.23
Of course most people would prefer not to have weaknesses. Our upbringings
and our experiences in the world have conditioned us to be embarrassed by our
weaknesses and hide them. But people are happiest when they can be
themselves. If you can be open with your weaknesses it will make you freer and
will help you deal with them better. I urge you to not be embarrassed about your
problems, recognizing that everyone has them. Bringing them to the surface will
help you break your bad habits and develop good ones, and you will acquire real
strengths and justifiable optimism.
This evolutionary process of productive adaptation and ascent—the process
of seeking, obtaining, and pursuing more and more ambitious goals—does not
just pertain to how individuals and society move forward. It is equally relevant
when dealing with setbacks, which are inevitable. At some point in your life you
will crash in a big way. You might fail at your job or with your family, lose a
loved one, suffer a serious accident or illness, or discover the life you imagined
is out of reach forever. There are a whole host of ways that something will get
you. At such times, you will be in pain and might think that you don’t have the
strength to go on. You almost always do, however; your ultimate success will
depend on you realizing that fact, even though it might not seem that way at the
moment.
This is why many people who have endured setbacks that seemed devastating
at the time ended up as happy as (or even happier than) they originally were after
they successfully adapted to them. The quality of your life will depend on the
choices you make at those painful moments. The faster one appropriately adapts,
the better.24 No matter what you want out of life, your ability to adapt and move
quickly and efficiently through the process of personal evolution will determine
your success and your happiness. If you do it well, you can change your
psychological reaction to it so that what was painful can become something you
crave.
1.8 Weigh second- and third-order consequences.
By recognizing the higher-level consequences nature optimizes for, I’ve come to
see that people who overweigh the first-order consequences of their decisions
and ignore the effects of second- and subsequent-order consequences rarely
reach their goals. This is because first-order consequences often have opposite
desirabilities from second-order consequences, resulting in big mistakes in
decision making. For example, the first-order consequences of exercise (pain and
time spent) are commonly considered undesirable, while the second-order
consequences (better health and more attractive appearance) are desirable.
Similarly, food that tastes good is often bad for you and vice versa.
Quite often the first-order consequences are the temptations that cost us what
we really want, and sometimes they are the barriers that stand in our way. It’s
almost as though nature sorts us by throwing us trick choices that have both
types of consequences and penalizing those who make their decisions on the
basis of the first-order consequences alone.
By contrast, people who choose what they really want, and avoid the
temptations and get over the pains that drive them away from what they really
want, are much more likely to have successful lives.
1.9 Own your outcomes.
For the most part, life gives you so many decisions to make and so many
opportunities to recover from your mistakes that, if you handle them well, you
can have a terrific life. Of course, sometimes there are major influences on the
quality of our lives that come from things beyond our control—the
circumstances we are born into, accidents and illnesses, and so forth—but for the
most part even the worst circumstances can be made better with the right
approach. For example, a friend of mine dove into a swimming pool, hit his
head, and became a quadriplegic. But he approached his situation well and
became as happy as anybody else, because there are many paths to happiness.
My point is simply this: Whatever circumstances life brings you, you will be
more likely to succeed and find happiness if you take responsibility for making
your decisions well instead of complaining about things being beyond your
control. Psychologists call this having an “internal locus of control,” and studies
consistently show that people who have it outperform those who don’t.
So don’t worry about whether you like your situation or not. Life doesn’t give
a damn about what you like. It’s up to you to connect what you want with what
you need to do to get it and then find the courage to carry it through. In the next
chapter I will show you the 5-Step Process that helped me learn about reality and
evolve.
1.10 Look at the machine from the higher level.
Our uniquely human ability to look down from a higher level doesn’t apply just
to understanding reality and the cause-effect relationships underlying it; it also
applies to looking down on yourself and those around you. I call this ability to
rise above your own and others’ circumstances and objectively look down on
them “higher-level thinking.” Higher-level thinking gives you the ability to
study and influence the cause-effect relationships at play in your life and use
them to get the outcomes you want.
a. Think of yourself as a machine operating within a machine and know that you have the
ability to alter your machines to produce better outcomes. You have your goals. I call
the way you will operate to achieve your goals your machine. It consists of a
design (the things that have to get done) and the people (who will do the things
that need getting done). Those people include you and those who help you. For
example, imagine that your goal is a military one: to take a hill from an enemy.
Your design for your “machine” might include two scouts, two snipers, four
infantrymen, and so on. While the right design is essential, it is only half the
battle. It is equally important to put the right people in each of those positions.
They need different qualities to do their jobs well—the scouts must be fast
runners, the snipers must be good marksmen—so that the machine will produce
the outcomes you seek.
b. By comparing your outcomes with your goals, you can determine how to modify your
machine. This evaluation and improvement process exactly mirrors the
evolutionary process I described earlier. It means looking at how to improve or
change the design or people to achieve your goals. Schematically, the process is
a feedback loop, as shown in the diagram on the opposite page.

c. Distinguish between you as the designer of your machine and you as a worker with
your machine. One of the hardest things for people to do is to objectively look
down on themselves within their circumstances (i.e., their machine) so that they
can act as the machine’s designer and manager. Most people remain stuck in the
perspective of being a worker within the machine. If you can recognize the
differences between those roles and that it is much more important that you are a
good designer/manager of your life than a good worker in it, you will be on the
right path. To be successful, the “designer/manager you” has to be objective
about what the “worker you” is really like, not believing in him more than he
deserves, or putting him in jobs he shouldn’t be in. Instead of having this
strategic perspective, most people operate emotionally and in the moment; their
lives are a series of undirected emotional experiences, going from one thing to
the next. If you want to look back on your life and feel you’ve achieved what
you wanted to, you can’t operate that way.
d. The biggest mistake most people make is to not see themselves and others objectively,
which leads them to bump into their own and others’ weaknesses again and again.
People who do this fail because they are stubbornly stuck in their own heads. If
they could just get around this, they could live up to their potential.
This is why higher-level thinking is essential for success.
e. Successful people are those who can go above themselves to see things objectively and
manage those things to shape change. They can take in the perspectives of others
instead of being trapped in their own heads with their own biases. They are able
to look objectively at what they are like—their strengths and weaknesses—and
what others are like to put the right people in the right roles to achieve their
goals. Once you understand how to do this you’ll see that there’s virtually
nothing you can’t accomplish. You will just have to learn how to face your
realities and use the full range of resources at your disposal. For example, if you
as the designer/manager discover that you as the worker can’t do something
well, you need to fire yourself as the worker and get a good replacement, while
staying in the role of designer/manager of your own life. You shouldn’t be upset
if you find out that you’re bad at something—you should be happy that you
found out, because knowing that and dealing with it will improve your chances
of getting what you want.
If you are disappointed because you can’t be the best person to do everything
yourself, you are terribly naive. Nobody can do everything well. Would you
want to have Einstein on your basketball team? When he fails to dribble and
shoot well, would you think badly of him? Should he feel humiliated? Imagine
all the areas in which Einstein was incompetent, and imagine how hard he
struggled to excel even in the areas in which he was the best in the world.
Watching people struggle and having others watch you struggle can elicit all
kinds of ego-driven emotions such as sympathy, pity, embarrassment, anger, or
defensiveness. You need to get over all that and stop seeing struggling as
something negative. Most of life’s greatest opportunities come out of moments
of struggle; it’s up to you to make the most of these tests of creativity and
character.
When encountering your weaknesses you have four choices:
1. You can deny them (which is what most people do).
2. You can accept them and work at them in order to try to convert them into
strengths (which might or might not work depending on your ability to
change).
3. You can accept your weaknesses and find ways around them.
4. Or, you can change what you are going after.
Which solution you choose will be critically important to the direction of
your life. The worst path you can take is the first. Denial can only lead to your
constantly banging up against your weaknesses, having pain, and not getting
anywhere. The second—accepting your weaknesses while trying to turn them
into strengths—is probably the best path if it works. But some things you will
never be good at and it takes a lot of time and effort to change. The best single
clue as to whether you should go down this path is whether the thing you are
trying to do is consistent with your nature (i.e., your natural abilities). The third
path—accepting your weaknesses while trying to find ways around them—is the
easiest and typically the most viable path, yet it is the one least followed. The
fourth path, changing what you are going after, is also a great path, though it
requires flexibility on your part to get past your preconceptions and enjoy the
good fit when you find it.
f. Asking others who are strong in areas where you are weak to help you is a great skill
that you should develop no matter what, as it will help you develop guardrails that will
prevent you from doing what you shouldn’t be doing. All successful people are good
at this.
g. Because it is difficult to see oneself objectively, you need to rely on the input of others
and the whole body of evidence. I know that my own life has been full of mistakes
and lots of great feedback. It was only by looking down on this body of evidence
from a higher level that I was able to get around my mistakes and go after what I
wanted. For as long as I have been practicing this, I still know I can’t see myself
objectively, which is why I continue to rely so much on the input of others.
h. If you are open-minded enough and determined, you can get virtually anything you
want. So I certainly don’t want to dissuade you from going after whatever you
want. At the same time, I urge you to reflect on whether what you are going after
is consistent with your nature. Whatever your nature is, there are many paths that
will suit you, so don’t fixate on just one. Should a particular path close, all you
have to do is find another good one consistent with what you’re like. (You’ll
learn a lot about how to determine what you’re like later, in Understand That
People Are Wired Very Differently.)
But most people lack the courage to confront their own weaknesses and make
the hard choices that this process requires. Ultimately, it comes down to the
following five decisions:
1. Don’t confuse what you wish were true with what is really true.
2. Don’t worry about looking good—worry instead about achieving your goals.
3. Don’t overweight first-order consequences relative to second- and third-order ones.
4. Don’t let pain stand in the way of progress.
5. Don’t blame bad outcomes on anyone but yourself.
14 I’m sure Transcendental Meditation, which I have been practicing regularly for nearly half a century,
helped provide me with the equanimity I needed to approach my challenges this way.
15 You shouldn’t assume that you are always the best person to make decisions for yourself because often
you aren’t. While it is up to us to know what we want, others may know how to get it better than we do
because they have strengths where we have weaknesses, or more relevant knowledge and experience. For
example, it’s probably better for you to follow your doctor’s advice than your own if you have a medical
condition. Later in this book, we will look at some of the different ways people’s brains are wired and how
our understanding of our own wiring should influence which choices we make for ourselves and which we
should delegate to others. Knowing when not to make your own decisions is one of the most important
skills you can develop.
16 I’ll explain the concept of believability in more detail in later chapters, but to cover it quickly:
Believable parties are those who have repeatedly and successfully accomplished something—and have
great explanations for how they did it.
17 There are many things people consider “good” in the sense that they are kind or considerate but fail to
deliver what’s desired (like communism’s “from each according to his ability, to each according to his
needs”). Nature would appear to consider them “bad,” and I’d agree with nature.
18 Everything other than evolution eventually disintegrates; we all are, and everything else is, vehicles for
evolution. For example, while we see ourselves as individuals, we are essentially vessels for our genes that
have lived millions of years and continuously use and shed bodies like ours.
19 I recommend Richard Dawkins’s and E. O. Wilson’s books on evolution. If I had to pick just one, it
would be Dawkins’s River Out of Eden.
20 Of course, we are often satisfied with the same things—relationships, careers, etc.—but when that is the
case, it is typically because we are getting new enjoyments from the changing dimensions of those things.
21 The marginal benefits of moving from a shortage to an abundance of anything decline.
22 Your unique power of reflectiveness—your ability to look at yourself, the world around you, and the
relationship between you and the world—means that you can think deeply and weigh subtle things to come
up with learning and wise choices. Asking other believable people about the root causes of your pain in
order to enhance your reflections is also typically very helpful—especially others who have opposing views
but who share your interest in finding the truth rather than being proven right. If you can reflect deeply
about your problems, they almost always shrink or disappear, because you almost always find a better way
of dealing with them than if you don’t face them head-on.
23 To be clear, I am not saying people should not be helped. I believe that people should be helped by
giving them opportunities and the coaching they need to become strong enough to take advantage of their
opportunities. As the saying goes, “God helps those who help themselves.” But this isn’t easy, especially
with people you care about. To be effective in helping people learn from painful experiences, you must
explain the logic and caring behind what you’re doing clearly and repeatedly. As you read in “Where I’m
Coming From,” this was a large part of what compelled me to explain my principles.
24 Your ability to see the changing landscape and adapt is more a function of your perception and reasoning
than your ability to learn and process quickly.
BAD
Avoid facing “harsh realities.”
GOOD
Face “harsh realities.”
BAD
Worry about appearing good.
GOOD
Worry about achieving the goal.
BAD
Make your decisions on the basis of firstorder consequences.
GOOD
Make your decisions on the basis of first-,
second-, and third-order consequences.
BAD
Allow pain to stand in the way of
progress.
GOOD
Understand how to manage pain to
produce progress.
BAD
Don’t hold yourself and others
accountable.
GOOD
Hold yourself and others accountable.
2 Use the 5-Step Process to Get What You
Want Out of Life
It seems to me that the personal evolutionary process—the looping I described
in the last chapter—takes place in five distinct steps. If you can do those five
things well, you will almost certainly be successful. Here they are in a nutshell:
1. Have clear goals.
2. Identify and don’t tolerate the problems that stand in the way of your achieving those
goals.
3. Accurately diagnose the problems to get at their root causes.
4. Design plans that will get you around them.
5. Do what’s necessary to push these designs through to results.
Together, these five steps make up a loop, like the one on the facing page.
Let’s look at this process more granularly.
First you have to pick what you are going after—your goals. Your choice of
goals will determine your direction. As you move toward them, you will
encounter problems. Some of those problems will bring you up against your
own weaknesses. How you react to the pain that causes is up to you. If you want
to reach your goals, you must be calm and analytical so that you can accurately
diagnose your problems, design a plan that will get you around them, and do
what’s necessary to push through to results. Then you will look at the new
results you achieve and go through the process again. To evolve quickly, you
will have to do this fast and continuously, setting your goals successively higher.
You will need to do all five steps well to be successful and you must do them
one at a time and in order. For example, when setting goals, just set goals. Don’t
think about how you will achieve them or what you will do if something goes
wrong. When you are diagnosing problems, don’t think about how you will
solve them—just diagnose them. Blurring the steps leads to suboptimal
outcomes because it interferes with uncovering the true problems. The process is
iterative: Doing each step thoroughly will provide you with the information you
need to move on to the next step and do it well.
It is essential that you approach this process in a clearheaded, rational way,
looking down on yourself from a higher level and being ruthlessly honest. If
your emotions are getting the better of you, step back and take time out until you
can reflect clearly. If necessary, seek guidance from calm, thoughtful people.
To help you stay centered and effective, pretend that your life is a martial art
or a game, the object of which is to get around a challenge and reach a goal.
Once you accept its rules, you’ll get used to the discomfort that comes with the
constant frustration. You will never handle everything perfectly: Mistakes are
inevitable and it’s impor-tant to recognize and accept this fact of life. The good
news is that every mistake you make can teach you something, so there’s no end
to learning. You’ll soon realize that excuses like “that’s not easy” or “it doesn’t
seem fair” or even “I can’t do that” are of no value and that it pays to push
through.
So what if you don’t have all the skills you need to succeed? Don’t worry
about it because that’s true for everyone. You just have to know when they are
needed and where you can go to get them. With practice, you will eventually
play this game with a calm unstoppable centeredness in the face of adversity.
Your ability to get what you want will thrill you.
Now let’s look at how to approach each of the five steps.
2.1 Have clear goals.
a. Prioritize: While you can have virtually anything you want, you can’t have everything
you want. Life is like a giant smorgasbord with more delicious alternatives than
you can ever hope to taste. Choosing a goal often means rejecting some things
you want in order to get other things that you want or need even more. Some
people fail at this point, before they’ve even started. Afraid to reject a good
alternative for a better one, they try to pursue too many goals at once, achieving
few or none of them. Don’t get discouraged and don’t let yourself be paralyzed
by all the choices. You can have much more than what you need to be happy.
Make your choice and get on with it.
b. Don’t confuse goals with desires. A proper goal is something that you really need
to achieve. Desires are things that you want that can prevent you from reaching
your goals. Typically, desires are first-order consequences. For example, your
goal might be physical fitness, while your desire is to eat good-tasting but
unhealthy food. Don’t get me wrong, if you want to be a couch potato, that’s fine
with me. You can pursue whatever goals you want. But if you don’t want to be a
couch potato, then you better not open that bag of chips.
c. Decide what you really want in life by reconciling your goals and your desires. Take
passion, for example. Without passion, life would be dull; you wouldn’t want to
live without it. But what’s key is what you do with your passion. Do you let it
consume you and drive you to irrational acts, or do you harness it to motivate
and drive you while you pursue your real goals? What will ultimately fulfill you
are things that feel right at both levels, as both desires and goals.
d. Don’t mistake the trappings of success for success itself. Achievement orientation is
important, but people who obsess over a $1,200 pair of shoes or a fancy car are
very rarely happy because they don’t know what it is that they really want and
hence what will satisfy them.
e. Never rule out a goal because you think it’s unattainable. Be audacious. There is
always a best possible path. Your job is to find it and have the courage to follow
it. What you think is attainable is just a function of what you know at the
moment. Once you start your pursuit you will learn a lot, especially if you
triangulate with others; paths you never saw before will emerge. Of course there
are some impossibilities or near-impossibilities, such as playing center on a
professional basketball team if you’re short, or running a four-minute mile at age
seventy.
f. Remember that great expectations create great capabilities. If you limit your goals
to what you know you can achieve, you are setting the bar way too low.
g. Almost nothing can stop you from succeeding if you have a) flexibility and b) selfaccountability. Flexibility is what allows you to accept what reality (or
knowledgeable people) teaches you; self-accountability is essential because if
you really believe that failing to achieve a goal is your personal failure, you will
see your failing to achieve it as indicative that you haven’t been creative or
flexible or determined enough to do what it takes. And you will be that much
more motivated to find the way.
h. Knowing how to deal well with your setbacks is as important as knowing how to move
forward. Sometimes you know that you are going over a waterfall and there is no
way to avoid it. Life will throw you such challenges, some of which will seem
devastating at the time. In bad times, your goal might be to keep what you have,
to minimize your rate of loss, or simply to deal with a loss that is irrevocable.
Your mission is to always make the best possible choices, knowing that you will
be rewarded if you do.
2.2 Identify and don’t tolerate problems.
a. View painful problems as potential improvements that are screaming at you. Though
it won’t feel that way at first, each and every problem you encounter is an
opportunity; for that reason, it is essential that you bring them to the surface.
Most people don’t like to do this, especially if it exposes their own weaknesses
or the weaknesses of someone they care about, but successful people know they
have to.
b. Don’t avoid confronting problems because they are rooted in harsh realities that are
unpleasant to look at. Thinking about problems that are difficult to solve may
make you anxious, but not thinking about them (and hence not dealing with
them) should make you more anxious still. When a problem stems from your
own lack of talent or skill, most people feel shame. Get over it. I cannot
emphasize this enough: Acknowledging your weaknesses is not the same as
surrendering to them. It’s the first step toward overcoming them. The pains you
are feeling are “growing pains” that will test your character and reward you as
you push through them.
c. Be specific in identifying your problems. You need to be precise, because different
problems have different solutions. If a problem is due to inadequate skill,
additional training may be called for; if it arises from an innate weakness, you
may need to seek assistance from someone else or change the role you play. In
other words, if you’re bad at accounting, hire an accountant. If a problem stems
from someone else’s weaknesses, replace them with someone who is strong
where it’s needed. That’s just the way it is.
d. Don’t mistake a cause of a problem with the real problem. “I can’t get enough
sleep” is not a problem; it is a potential cause (or perhaps the result) of a
problem. To clarify your thinking, try to identify the bad outcome first; e.g., “I
am performing poorly in my job.” Not sleeping enough may be the cause of that
problem, or the cause may be something else—but in order to determine that,
you need to know exactly what the problem is.
e. Distinguish big problems from small ones. You only have so much time and
energy; make sure you are investing them in exploring the problems that, if
fixed, will yield you the biggest returns. But at the same time, make sure you
spend enough time with the small problems to make sure they’re not symptoms
of larger ones.
f. Once you identify a problem, don’t tolerate it. Tolerating a problem has the same
consequences as failing to identify it. Whether you tolerate it because you
believe it cannot be solved, because you don’t care enough to solve it, or because
you can’t muster enough of whatever it takes to solve it, if you don’t have the
will to succeed, then your situation is hopeless. You need to develop a fierce
intolerance of badness of any kind, regardless of its severity.
2.3 Diagnose problems to get at their root causes.
a. Focus on the “what is” before deciding “what to do about it.” It is a common
mistake to move in a nanosecond from identifying a tough problem to proposing
a solution for it. Strategic thinking requires both diagnosis and design. A good
diagnosis typically takes between fifteen minutes and an hour, depending on
how well it’s done and how complex the issue is. It involves speaking with the
relevant people and looking at the evidence together to determine the root
causes. Like principles, root causes manifest themselves over and over again in
seemingly different situations. Finding them and dealing with them pays
dividends again and again.
b. Distinguish proximate causes from root causes. Proximate causes are typically the
actions (or lack of actions) that lead to problems, so they are described with
verbs (I missed the train because I didn’t check the train schedule). Root causes
run much deeper and they are typically described with adjectives (I didn’t check
the train schedule because I am forgetful). You can only truly solve your
problems by removing their root causes, and to do that, you must distinguish the
symptoms from the disease.
c. Recognize that knowing what someone (including you) is like will tell you what you can
expect from them. You will have to get over your reluctance to assess what people
are like if you want to surround yourself with people who have the qualities you
need. That goes for yourself too. People almost always find it difficult to identify
and accept their own mistakes and weaknesses. Sometimes it’s because they’re
blind to them, but more often it’s because their egos get in the way. Most likely
your associates are equally reluctant to point out your mistakes, because they
don’t want to hurt you. You all need to get over this. More than anything else,
what differentiates people who live up to their potential from those who don’t is
their willingness to look at themselves and others objectively and understand the
root causes standing in their way.
2.4 Design a plan.
a. Go back before you go forward. Replay the story of where you have been (or
what you have done) that led up to where you are now, and then visualize what
you and others must do in the future so you will reach your goals.
b. Think about your problem as a set of outcomes produced by a machine. Practice
higher-level thinking by looking down on your machine and thinking about how
it can be changed to produce better outcomes.
c. Remember that there are typically many paths to achieving your goals. You only
need to find one that works.
d. Think of your plan as being like a movie script in that you visualize who will do what
through time. Sketch out the plan broadly at first (e.g., “hire great people”) and
then refine it. You should go from the big picture and drill down to specific tasks
and estimated time lines (e.g., “In the next two weeks, choose the headhunters
who will find those great people”). The real-world issues of costs, time, and
personnel will undoubtedly surface as you do this, and that will lead you to
further refine your design until all the gears in the machine are meshing
smoothly.
e. Write down your plan for everyone to see and to measure your progress against. This
includes all the granular details about who needs to do what tasks and when. The
tasks, the narrative, and the goals are different, so don’t mix them up.
Remember, the tasks are what connect the narrative to your goals.
f. Recognize that it doesn’t take a lot of time to design a good plan. A plan can be
sketched out and refined in just hours or spread out over days or weeks. But the
process is essential because it determines what you will have to do to be
effective. Too many people make the mistake of spending virtually no time on
designing because they are preoccupied with execution. Remember: Designing
precedes doing!
2.5 Push through to completion.
a. Great planners who don’t execute their plans go nowhere. You need to push through
and that requires self-discipline to follow your script. It’s important to remember
the connections between your tasks and the goals that they are meant to achieve.
When you feel yourself losing sight of that, stop and ask yourself “why?” Lose
sight of the why and you will surely lose sight of your goals.
b. Good work habits are vastly underrated. People who push through successfully
have to-do lists that are reasonably prioritized, and they make certain each item
is ticked off in order.
c. Establish clear metrics to make certain that you are following your plan. Ideally,
someone other than you should be objectively measuring and reporting on your
progress. If you’re not hitting your targets, that’s another problem that needs to
be diagnosed and solved. There are many successful, creative people who aren’t
good at execution. They succeed because they forge symbiotic relationships with
highly reliable task-doers.
That’s all there is to it!
Remember that all 5 Steps proceed from your values. Your values determine
what you want, i.e., your goals. Also keep in mind that the 5 Steps are iterative.
When you complete one step, you will have acquired information that will most
likely lead you to modify the other steps. When you’ve completed all five, you’ll
start again with a new goal. If the process is working, your goals will change
more slowly than your designs, which will change more slowly than your tasks.
One last important point: You will need to synthesize and shape well. The
first three steps—setting goals, identifying problems, and then diagnosing them
—are synthesizing (by which I mean knowing where you want to go and what’s
really going on). Designing solutions and making sure that the designs are
implemented are shaping.
2.6 Remember that weaknesses don’t matter if you find
solutions.
You almost certainly can’t do all these steps well, because each requires
different types of thinking and virtually nobody can think well in all these ways.
For example, goal setting (such as determining what you want your life to be)
requires you to be good at higher-level thinking like visualization and
prioritization. Identifying and not tolerating problems requires you to be
perceptive and good at synthesis and maintaining high standards; diagnosis
requires you to be logical, able to see multiple possibilities, and willing to have
hard conversations with others; designing requires visualization and practicality;
doing what you set out to do requires self-discipline, good work habits, and a
results orientation. Who do you know who has all those qualities? Probably no
one. Yet doing all 5 Steps well is required for being really successful. So what
do you do? First and foremost, have humility so you can get what you need from
others!
Everyone has weaknesses. They are generally revealed in the patterns of
mistakes they make. Knowing what your weaknesses are and staring hard at
them is the first step on the path to success.
a. Look at the patterns of your mistakes and identify at which step in the 5-Step Process
you typically fail. Ask others for their input too, as nobody can be fully objective
about themselves.
b. Everyone has at least one big thing that stands in the way of their success; find yours
and deal with it. Write down what your one big thing is (such as identifying
problems, designing solutions, pushing through to results) and why it exists
(your emotions trip you up, you can’t visualize adequate possibilities). While
you and most people probably have more than one major impediment, if you can
remove or get around that one really big one, you will hugely improve your life.
If you work on it, you will almost certainly be able to deal successfully with
your one big thing.
You can either fix it or you can get the help of others to deal with it well.
There are two paths to success: 1) to have what you need yourself or 2) to get it
from others. The second path requires you to have humility. Humility is as
important, or even more important, as having the strengths yourself. Having both
is best. On the following page is a template that some people find helpful.
2.7 Understand your own and others’ mental maps and
humility.
Some people are good at knowing what to do on their own; they have good
mental maps. Maybe they acquired them from being taught; maybe they were
blessed with an especially large dose of common sense. Whatever the case, they
have more answers inside themselves than others do. Similarly, some people are
more humble and open-minded than others. Humility can be even more valuable
than having good mental maps if it leads you to seek out better answers than you
could come up with on your own. Having both open-mindedness and good
mental maps is most powerful of all.
To convey this simple concept, imagine rating from one to ten how good
someone’s mental map is (in other words, what they know) on the Y-axis and
how humble/open-minded they are on the X-axis, as shown on the opposite
page.
Everyone starts out in the lower left area, with poor mental maps and little
open-mindedness, and most people remain tragically and arrogantly stuck in that
position. You can improve by either going up on the mental-maps axis (by
learning how to do things better) or out on the open-mindedness axis. Either will
provide you with better knowledge of what to do. If you have good mental maps
and low open-mindedness, that will be good but not great. You will still miss a
lot that is of value. Similarly, if you have high open-mindedness but bad mental
maps, you will probably have challenges picking the right people and points of
view to follow. The person who has good mental maps and a lot of openmindedness will always beat out the person who doesn’t have both.
Now take a minute to think about your path to becoming more effective.
Where would you place yourself on this chart? Ask others where they’d place
you.
Once you understand what you’re missing and gain open-mindedness that
will allow you to get help from others, you’ll see that there’s virtually nothing
you can’t accomplish.
Most people fail to do this most of the time. In the next chapters, I’ll explore
why and how to rectify that.
3 Be Radically Open-Minded
This is probably the most important chapter because it explains how to get
around the two things standing in most people’s way of getting what they want
out of life. These barriers exist because of the way that our brains work, so
nearly everyone encounters them.
3.1 Recognize your two barriers.
The two biggest barriers to good decision making are your ego and your blind
spots. Together, they make it difficult for you to objectively see what is true
about you and your circumstances and to make the best possible decisions by
getting the most out of others. If you can understand how the machine that is the
human brain works, you can understand why these barriers exist and how to
adjust your behavior to make yourself happier, more effective, and better at
interacting with others.
a. Understand your ego barrier. When I refer to your “ego barrier,” I’m referring to
your subliminal defense mechanisms that make it hard for you to accept your
mistakes and weaknesses. Your deepest-seated needs and fears—such as the
need to be loved and the fear of losing love, the need to survive and the fear of
not surviving, the need to be important and the fear of not mattering—reside in
primitive parts of your brain such as the amygdala, which are structures in your
temporal lobe that process emotions. Because these areas of your brain are not
accessible to your conscious awareness, it is virtually impossible for you to
understand what they want and how they control you. They oversimplify things
and react instinctively. They crave praise and respond to criticism as an attack,
even when the higher-level parts of the brain understand that constructive
criticism is good for you. They make you defensive, especially when it comes to
the subject of how good you are.
At the same time, higher-level consciousness resides in your neocortex, more
specifically in the part called the prefrontal cortex. This is the most distinctively
human feature of your brain; relative to the rest of the brain, it’s larger in
humans than in most other species. This is where you experience the conscious
awareness of decision making (the so-called “executive function”), as well as the
application of logic and reasoning.
b. Your two “yous” fight to control you. It’s like Dr. Jekyll and Mr. Hyde, though
your higher-level you is not aware of your lower-level you. This conflict is
universal; if you pay close enough attention, you can actually see when the
different parts of a person’s brain are arguing with one another. For example,
when someone gets “angry with himself,” his prefrontal cortex is sparring with
his amygdala (or other lower-level parts of his brain25). When someone asks,
“Why did I let myself eat all that cake?” the answer is “Because the lower-level
you won out over the thoughtful, higher-level you.”
Once you understand how your a) logical/conscious you and b)
emotional/subconscious you fight with each other, you can imagine what it’s like
when your two yous deal with other people and their own two “thems.” It’s a
mess. Those lower-level selves are like attack dogs—they want to fight even
when their higher-level selves want to figure things out. This is very confusing
because you and the people you are dealing with typically don’t even know that
these lower-level beasts exist, never mind that they are trying to hijack
everyone’s behavior.
Let’s look at what tends to happen when someone disagrees with you and
asks you to explain your thinking. Because you are programmed to view such
challenges as attacks, you get angry, even though it would be more logical for
you to be interested in the other person’s perspective, especially if they are
intelligent. When you try to explain your behavior, your explanations don’t
make any sense. That’s because your lower-level you is trying to speak through
your upper-level you. Your deep-seated, hidden motivations are in control, so it
is impossible for you to logically explain what “you” are doing.
Even the most intelligent people generally behave this way, and it’s tragic. To
be effective you must not let your need to be right be more important than your
need to find out what’s true. If you are too proud of what you know or of how
good you are at something you will learn less, make inferior decisions, and fall
short of your potential.
c. Understand your blind spot barrier. In addition to your ego barrier, you (and
everyone else) also have blind spots—areas where your way of thinking prevents
you from seeing things accurately. Just as we all have different ranges for
hearing pitch and seeing colors, we have different ranges for seeing and
understanding things. We each see things in our own way. For example, some
people naturally see big pictures and miss small details while others naturally see
details and miss big pictures; some people are linear thinkers while others think
laterally, and so on.
Naturally, people can’t appreciate what they can’t see. A person who can’t
identify patterns and synthesize doesn’t know what it’s like to see patterns and
synthesize any more than a color-blind person knows what it’s like to see color.
These differences in how our brains work are much less apparent than the
differences in how our bodies work. Color-blind people eventually find out that
they are color-blind, whereas most people never see or understand the ways in
which their ways of thinking make them blind. To make it even harder, we don’t
like to see ourselves or others as having blind spots, even though we all have
them. When you point out someone’s psychological weakness, it’s generally
about as well received as if you pointed out a physical weakness.
If you’re like most people, you have no clue how other people see things and
aren’t good at seeking to understand what they are thinking, because you’re too
preoccupied with telling them what you yourself think is correct. In other words,
you are closed-minded; you presume too much. This closed-mindedness is
terribly costly; it causes you to miss out on all sorts of wonderful possibilities
and dangerous threats that other people might be showing you—and it blocks
criticism that could be constructive and even lifesaving.
The end result of these two barriers is that parties in disagreements typically
remain convinced that they’re right—and often end up angry at each other. This
is illogical and leads to suboptimal decision making. After all, when two people
reach opposite conclusions, someone must be wrong. Shouldn’t you want to
make sure that someone isn’t you?
This failure to benefit from others’ thinking doesn’t just occur when
disagreements arise; it occurs when people encounter problems that they are
trying to solve. When trying to figure things out, most people spin in their own
heads instead of taking in all the wonderful thinking available to them. As a
result, they continually run toward what they see and keep crashing into what
they are blind to until the crashing leads them to adapt. Those who adapt do so
by a) teaching their brains to work in a way that doesn’t come naturally (the
creative person learns to become organized through discipline and practice, for
instance), b) using compensating mechanisms (such as programmed reminders),
and/or c) relying on the help of others who are strong where they are weak.
Differences in thinking can be symbiotic and complementary instead of
disruptive. For example, the lateral approach to thinking common among
creative people can lead them to be unreliable, while more linear thinkers are
often more dependable; some people are more emotional while others are more
logical, and so on. None of these individuals would be able to succeed at any
kind of complex project without the help of others who have complementary
strengths.
Aristotle defined tragedy as a terrible outcome arising from a person’s fatal
flaw—a flaw that, had it been fixed, instead would have led to a wonderful
outcome. In my opinion, these two barriers—ego and blind spots—are the fatal
flaws that keep intelligent, hardworking people from living up to their potential.
Would you like to learn how to get past them? You can do it; everybody can.
Here’s how.
3.2 Practice radical open-mindedness.
If you know that you are blind, you can figure out a way to see, whereas if you
don’t know that you’re blind, you will continue to bump into your problems. In
other words, if you can recognize that you have blind spots and open-mindedly
consider the possibility that others might see something better than you—and
that the threats and opportunities they are trying to point out really exist—you
are more likely to make good decisions.
Radical open-mindedness is motivated by the genuine worry that you might
not be seeing your choices optimally. It is the ability to effectively explore
different points of view and different possibilities without letting your ego or
your blind spots get in your way. It requires you to replace your attachment to
always being right with the joy of learning what’s true. Radical openmindedness allows you to escape from the control of your lower-level you and
ensures your upper-level you sees and considers all the good choices and makes
the best possible decisions. If you can acquire this ability—and with practice you
can—you’ll be able to deal with your realities more effectively and radically
improve your life.
Most people don’t understand what it means to be radically open-minded.
They describe open-mindedness as being “open to being wrong,” but stubbornly
cling to whatever opinion is in their head and fail to seek an understanding of the
reasoning behind alternative points of view. To be radically open-minded you
must:
a. Sincerely believe that you might not know the best possible path and recognize that
your ability to deal well with “not knowing” is more important than whatever it is you do
know. Most people make bad decisions because they are so certain that they’re
right that they don’t allow themselves to see the better alternatives that exist.
Radically open-minded people know that coming up with the right questions and
asking other smart people what they think is as important as having all the
answers. They understand that you can’t make a great decision without
swimming for a while in a state of “not knowing.” That is because what exists
within the area of “not knowing” is so much greater and more exciting than
anything any one of us knows.
b. Recognize that decision making is a two-step process: First take in all the relevant
information, then decide. Most people are reluctant to take in information that is
inconsistent with what they have already concluded. When I ask why, a common
answer is: “I want to make up my own mind.” These people seem to think that
considering opposing views will somehow threaten their ability to decide what
they want to do. Nothing could be further from the truth. Taking in others’
perspectives in order to consider them in no way reduces your freedom to think
independently and make your own decisions. It will just broaden your
perspective as you make them.
c. Don’t worry about looking good; worry about achieving your goal.
People typically try to prove that they have the answer even when they don’t.
Why do they behave in this unproductive way? It’s generally because they
believe the senseless but common view that great people have all the answers
and don’t have any weaknesses. Not only does this view not square with reality,
it stands in the way of their progress. People interested in making the best
possible decisions are rarely confident that they have the best answers. They
recognize that they have weaknesses and blind spots, and they always seek to
learn more so that they can get around them.
d. Realize that you can’t put out without taking in. Most people seem much more
eager to put out (convey their thinking and be productive) than to take in (learn).
That’s a mistake even if one’s primary goal is to put out, because what one puts
out won’t be good unless one takes in as well.
e. Recognize that to gain the perspective that comes from seeing things through another’s
eyes, you must suspend judgment for a time—only by empathizing can you properly
evaluate another point of view. Open-mindedness doesn’t mean going along with
what you don’t believe in; it means considering the reasoning of others instead
of stubbornly and illogically holding on to your own point of view. To be
radically open-minded, you need to be so open to the possibility that you could
be wrong that you encourage others to tell you so.
f. Remember that you’re looking for the best answer, not simply the best answer that you
can come up with yourself. The answer doesn’t have to be in your head; you can
look outside yourself. If you’re truly looking at things objectively, you must
recognize that the probability of you always having the best answer is small and
that, even if you have it, you can’t be confident that you do before others test
you. So it is invaluable to know what you don’t know. Ask yourself: Am I
seeing this just through my own eyes? If so, then you should know that you’re
terribly handicapped.
g. Be clear on whether you are arguing or seeking to understand, and think about which
is most appropriate based on your and others’ believability. If both parties are peers,
it’s appropriate to argue. But if one person is clearly more knowledgeable than
the other, it is preferable for the less knowledgeable person to approach the more
knowledgeable one as a student and for the more knowledgeable one to act as a
teacher. Doing this well requires you to understand the concept of believability. I
define believable people as those who have repeatedly and successfully
accomplished the thing in question—who have a strong track record with at least
three successes—and have great explanations of their approach when probed.
If you have a different view than someone who is believable on the topic at
hand—or at least more believable than you are (if, say, you are in a discussion
with your doctor about your health)—you should make it clear that you are
asking questions because you are seeking to understand their perspective.
Conversely, if you are clearly the more believable person, you might politely
remind the other of that and suggest that they ask you questions.
All these strategies come together in two practices that, if you seek to become
radically open-minded, you must master.
3.3 Appreciate the art of thoughtful disagreement.
When two people believe opposite things, chances are that one of them is wrong.
It pays to find out if that someone is you. That’s why I believe you must
appreciate and develop the art of thoughtful disagreement. In thoughtful
disagreement, your goal is not to convince the other party that you are right—it
is to find out which view is true and decide what to do about it. In thoughtful
disagreement, both parties are motivated by the genuine fear of missing
important perspectives. Exchanges in which you really see what the other person
is seeing and they really see what you are seeing—with both your “higher-level
yous” trying to get to the truth—are immensely helpful and a giant source of
untapped potential.
To do this well, approach the conversation in a way that conveys that you’re
just trying to understand.26 Use questions rather than make statements. Conduct
the discussion in a calm and dispassionate manner, and encourage the other
person to do that as well. Remember, you are not arguing; you are openly
exploring what’s true. Be reasonable and expect others to be reasonable. If
you’re calm, collegial, and respectful you will do a lot better than if you are not.
You’ll get better at this with practice.
To me, it’s pointless when people get angry with each other when they
disagree because most disagreements aren’t threats as much as opportunities for
learning. People who change their minds because they learned something are the
winners, whereas those who stubbornly refuse to learn are the losers. That
doesn’t mean that you should blindly accept others’ conclusions. You should be
what I call open-minded and assertive at the same time—you should hold and
explore conflicting possibilities in your mind while moving fluidly toward
whatever is likely to be true based on what you learn. Some people can do this
easily while others can’t. A good exercise to make sure that you are doing this
well is to describe back to the person you are disagreeing with their own
perspective. If they agree that you’ve got it, then you’re in good shape. I also
recommend that both parties observe a “two-minute rule” in which neither
interrupts the other, so they both have time to get all their thoughts out.
Some people worry that operating this way is time consuming. Working
through disagreements does take time but it’s just about the best way you can
spend it. What’s important is that you prioritize what you spend time on and who
you spend it with. There are lots of people who will disagree with you, and it
would be unproductive to consider all their views. It doesn’t pay to be openminded with everyone. Instead, spend your time exploring ideas with the most
believable people you have access to.
If you find you’re at an impasse, agree on a person you both respect and enlist
them to help moderate the discussion. What’s really counterproductive is
spinning in your own head about what’s going on, which most people are prone
to do—or wasting time disagreeing past the point of diminishing returns. When
that happens, move on to a more productive way of getting to a mutual
understanding, which isn’t necessarily the same thing as agreement. For
example, you might agree to disagree.
Why doesn’t thoughtful disagreement like this typically occur? Because most
people are instinctively reluctant to disagree. For example, if two people go to a
restaurant and one says he likes the food, the other is more likely to say “I like it
too” or not say anything at all, even if that’s not true. The reluctance to disagree
is the “lower-level you’s” mistaken interpretation of disagreement as conflict.
That’s why radical open-mindedness isn’t easy: You need to teach yourself the
art of having exchanges in ways that don’t trigger such reactions in yourself or
others. This was what I had to learn back when Bob, Giselle, and Dan told me I
made people feel belittled.
Holding wrong opinions in one’s head and making bad decisions based on
them instead of having thoughtful disagreements is one of the greatest tragedies
of mankind. Being able to thoughtfully disagree would so easily lead to radically
improved decision making in all areas—public policy, politics, medicine,
science, philanthropy, personal relationships, and more.
3.4 Triangulate your view with believable people who
are willing to disagree.
By questioning experts individually and encouraging them to have thoughtful
disagreement with each other that I can listen to and ask questions about, I both
raise my probability of being right and become much better educated. This is
most true when the experts disagree with me or with each other. Smart people
who can thoughtfully disagree are the greatest teachers, far better than a
professor assigned to stand in front of a board and lecture at you. The knowledge
I acquire usually leads to principles that I develop and refine for similar cases
that arise in the future.
In some cases in which the subjects are just too complex for me to understand
in the time required, I will turn over the decision making to knowledgeable
others who are more believable than me, but I still want to listen in on their
thoughtful disagreement. I find that most people don’t do that—they prefer to
make their own decisions, even when they’re not qualified to make the kinds of
judgments required. In doing so, they’re giving in to their lower-level selves.
This approach of triangulating the views of believable people can have a
profound effect on your life. I know it has made the difference between life and
death for me. In June 2013, I went to Johns Hopkins for an annual physical,
where I was told that I had a precancerous condition called Barrett’s esophagus
with high-grade dysplasia. Dysplasia is an early stage in the development of
cancer, and the probability that it will turn into esophageal cancer is relatively
high—about 15 percent of cases per year. Cancer of the esophagus is deadly, so
if left untreated, the odds were that in something like three to five years I’d
develop cancer and die. The standard protocol for cases like mine is to remove
the esophagus, but I wasn’t a candidate for that because of something specific to
my condition. The doctor advised that I wait and see how things progressed.
In the weeks that followed, I started to plan for my eventual death, while also
fighting to live. I like to:
a. Plan for the worst-case scenario to make it as good as possible. I felt fortunate
because this prognosis gave me enough time to ensure that the people I cared
most about would be okay without me, and to savor life with them in the years I
had left. I would have time to get to know my first grandson, who had just been
born, but not so much time that I could take it for granted.
But as you know by now, rather than following what I am told is best, even
by an expert, I like to triangulate opinions with believable people. So I also had
my personal physician, Dr. Glazer, set up visits with four other experts on this
particular disease.
The first call was with the head of thoracic surgery at a major cancer hospital.
She explained that my condition had advanced quickly and that, contrary to what
the first physician said, there was a surgery that could cure me. It would involve
removing both my esophagus and my stomach and attaching my intestines to the
remaining little bit of my esophagus I’d have left. She estimated I’d have a 10
percent chance of dying on the operating table and a 70 percent chance of a
crippling outcome. But the odds were in favor of my living, so her
recommendation was clearly worth taking seriously. Naturally I wanted her to
speak with the doctor from Johns Hopkins who originally diagnosed me and
recommended a watch-and-wait approach, so right then and there I called the
other doctor to see what each would say about the other’s views. This was eyeopening. While the two doctors had told me completely different things when I
met with them in person, when they were on the phone together, they sought to
minimize their disagreement and make the other look good, putting professional
courtesy ahead of thrashing things out to get at the best answer. Still, the
differences in their views were clear, and listening to them deepened my
understanding.
The next day I met with a third doctor who was a world-renowned specialist
and researcher at another esteemed hospital. He told me that my condition would
basically cause me no problems so long as I came in for an endoscopic
examination every three months. He explained that it was like skin cancer but on
the inside—if it was watched and any new growth was clipped before it
metastasized into the bloodstream, I’d be okay. According to him, the results for
patients monitored in this way were no different than for those who had their
esophagus removed. To put that plainly: They didn’t die from cancer. Life went
on as normal for them except for those occasional examinations and procedures.
To recap: Over the course of forty-eight hours, I had gone from a likely death
sentence to a likely cure that would essentially involve disemboweling me, and
then finally to a simple, and only slightly inconvenient, way of watching for
abnormalities and removing them before they could cause any harm. Was this
doctor wrong?
Dr. Glazer and I went on to meet two other world-class specialists and they
both agreed that undergoing the scoping procedure would do no harm, so I
decided to go ahead with it. During the procedure, they clipped some tissue from
my esophagus and sent it to the laboratory for testing. A few days after the
procedure, exactly a week before my sixty-fourth birthday, I got the results.
They were shocking to say the least. After analyzing the tissue, it turned out
there wasn’t any high-grade dysplasia at all!
Even experts can make mistakes; my point is simply that it pays to be
radically open-minded and triangulate with smart people. Had I not pushed for
other opinions, my life would have taken a very different course. My point is
that you can significantly raise your probabilities of making the right decisions
by open-mindedly triangulating with believable people.
3.5 Recognize the signs of closed-mindedness and openmindedness that you should watch out for.
It’s easy to tell an open-minded person from a closed-minded person because
they act very differently. Here are some cues to tell you whether you or others
are being closed-minded:
1. Closed-minded people don’t want their ideas challenged. They are typically
frustrated that they can’t get the other person to agree with them instead of
curious as to why the other person disagrees. They feel bad about getting
something wrong and are more interested in being proven right than in
asking questions and learning others’ perspectives.
Open-minded people are more curious about why there is disagreement.
They are not angry when someone disagrees. They understand that there is
always the possibility that they might be wrong and that it’s worth the little
bit of time it takes to consider the other person’s views in order to be sure
they aren’t missing something or making a mistake.
2. Closed-minded people are more likely to make statements than ask questions.
While believability entitles you to make statements in certain
circumstances, truly open-minded people, even the most believable people
I know, always ask a lot of questions. Nonbelievable people often tell me
that their statements are actually implicit questions, though they’re phrased
as low-confidence statements. While that’s sometimes true, in my
experience it’s more often not.
Open-minded people genuinely believe they could be wrong; the questions
that they ask are genuine. They also assess their relative believability to
determine whether their primary role should be as a student, a teacher, or a
peer.
3. Closed-minded people focus much more on being understood than on
understanding others. When people disagree, they tend to be quicker to
assume that they aren’t being understood than to consider whether they’re
the ones who are not understanding the other person’s perspective.
Open-minded people always feel compelled to see things through others’
eyes.
4. Closed-minded people say things like “I could be wrong . . . but here’s my
opinion.” This is a classic cue I hear all the time. It’s often a perfunctory
gesture that allows people to hold their own opinion while convincing
themselves that they are being open-minded. If your statement starts with
“I could be wrong” or “I’m not believable,” you should probably follow it
with a question and not an assertion.
Open-minded people know when to make statements and when to ask
questions.
5. Closed-minded people block others from speaking. If it seems like someone
isn’t leaving space for the other person in a conversation, it’s possible they
are blocking. To get around blocking, enforce the “two-minute rule” I
mentioned earlier.
Open-minded people are always more interested in listening than in
speaking; they encourage others to voice their views.
6. Closed-minded people have trouble holding two thoughts simultaneously in
their minds. They allow their own view to crowd out those of others.
Open-minded people can take in the thoughts of others without losing their
ability to think well—they can hold two or more conflicting concepts in
their mind and go back and forth between them to assess their relative
merits.
7. Closed-minded people lack a deep sense of humility. Humility typically
comes from an experience of crashing, which leads to an enlightened focus
on knowing what one doesn’t know.
Open-minded people approach everything with a deep-seated fear that they
may be wrong.
Once you can sort out open-minded from closed-minded people, you’ll find that
you want to surround yourself with open-minded ones. Doing so will not only
make your decision making more effective but you’ll also learn a tremendous
amount. A few good decision makers working effectively together can
significantly outperform a good decision maker working alone—and even the
best decision maker can significantly improve his or her decision making with
the help of other excellent decision makers.
3.6 Understand how you can become radically openminded.
No matter how open-minded you are now, it is something you can learn. To
practice open-mindedness:
a. Regularly use pain as your guide toward quality reflection. Mental pain often comes
from being too attached to an idea when a person or an event comes along to
challenge it. This is especially true when what is being pointed out to you
involves a weakness on your part. This kind of mental pain is a clue that you are
potentially wrong and that you need to think about the question in a quality way.
To do this, first calm yourself down. This can be difficult: You will probably
feel your amygdala kicking in through a tightening in your head, tension in your
body, or an emerging sense of annoyance, anger, or irritability. Note these
feelings when they arise in you. By being aware of such signals of closedmindedness, you can use them as cues to control your behavior and guide
yourself toward open-mindedness. Doing this regularly will strengthen your
ability to keep your “higher-level you” in control. The more you do it, the
stronger you will become.
b. Make being open-minded a habit. The life that you will live is most simply the
result of habits you develop. If you consistently use feelings of anger/frustration
as cues to calm down, slow down, and approach the subject at hand thoughtfully,
over time you’ll experience negative emotions much less frequently and go
directly to the open-minded practices I just described.
Of course, this can be very hard for people to do in the moment because your
“lower-level you” emotions are so powerful. The good news is that these
“amygdala hijackings”27 don’t last long so even if you’re having trouble
controlling yourself in the moment, you can also allow a little time to pass to
give your higher-level you space to reflect in a quality way. Have others whom
you respect help you too.
c. Get to know your blind spots. When you are closed-minded and form an opinion
in an area where you have a blind spot, it can be deadly. So take some time to
record the circumstances in which you’ve consistently made bad decisions
because you failed to see what others saw. Ask others—especially those who’ve
seen what you’ve missed—to help you with this. Write a list, tack it up on the
wall, and stare at it. If ever you find yourself about to make a decision
(especially a big decision) in one of these areas without consulting others,
understand that you’re taking a big risk and that it would be illogical to expect
that you’ll get the results you think you will.
d. If a number of different believable people say you are doing something wrong and you
are the only one who doesn’t see it that way, assume that you are probably biased. Be
objective! While it is possible that you are right and they are wrong, you should
switch from a fighting mode to an “asking questions” mode, compare your
believability with theirs, and if necessary agree to bring in a neutral party you all
respect to break the deadlock.
e. Meditate. I practice Transcendental Meditation and believe that it has enhanced
my open-mindedness, higher-level perspective, equanimity, and creativity. It
helps slow things down so that I can act calmly even in the face of chaos, just
like a ninja in a street fight. I’m not saying that you have to meditate in order to
develop this perspective; I’m just passing along that it has helped me and many
other people and I recommend that you seriously consider exploring it.
f. Be evidence-based and encourage others to be the same. Most people do not look
thoughtfully at the facts and draw their conclusions by objectively weighing the
evidence. Instead, they make their decisions based on what their deep-seated
subconscious mind wants and then they filter the evidence to make it consistent
with those desires. It is possible to become aware of this subconscious process
happening and to catch yourself, or to allow others to catch you going down this
path. When you’re approaching a decision, ask yourself: Can you point to clear
facts (i.e., facts believable people wouldn’t dispute) leading to your view? If not,
chances are you’re not being evidence-based.
g. Do everything in your power to help others also be open-minded.
Being calm and reasonable in how you present your view will help prevent the
“flight-or-fight” animal/amygdala reaction in others. Be reasonable and expect
others to be reasonable. Ask them to point to the evidence that supports their
point of view. Remember, it is not an argument; it is an open exploration of
what’s true. Demonstrating that you are taking in what they are telling you can
be helpful.
h. Use evidence-based decision-making tools. These principles were designed to help
you get control over your lower-level/animal you and put your better, higherlevel decision-making brain in charge.
What if you could unplug that lower part of your brain entirely and instead
connect with a decision-making computer that gives you logically derived
instructions, as we do with our investment systems? Suppose this computerbased decision-making machine has a much better track record than you because
it captures more logic, processes more information more quickly, and makes
decisions without being emotionally hijacked. Would you use it? In confronting
the challenges I’ve faced in the course of my career I’ve created exactly such
tools, and I am convinced that I would not have been nearly as successful
without them. I have no doubt that in the years ahead such “machine-thinking”
tools will continue to develop and that smart decision makers will learn how to
integrate them into their thinking. I urge you to learn about them and consider
using them.
i. Know when it’s best to stop fighting and have faith in your decision-making process.
It’s important that you think independently and fight for what you believe in, but
there comes a time when it’s wiser to stop fighting for your view and move on to
accepting what believable others think is best. This can be extremely difficult.
But it’s smarter and ultimately better for you to be open-minded and have faith
that the consensus of believable others is better than whatever you think. If you
can’t understand their view, you’re probably just blind to their way of thinking.
If you continue doing what you think is best when all the evidence and
believable people are against you, you’re being dangerously arrogant.
The truth is that while most people can become radically open-minded, some
can’t, even after they have repeatedly encountered lots of pain from betting that
they were right when they were not.28 People who don’t learn radical openmindedness don’t experience the metamorphosis that allows them to do much
better. I myself had to have that humility beaten into me by my crashes,
especially my big one in 1982. Gaining open-mindedness doesn’t mean losing
assertiveness. In fact, because it increases one’s odds of being right, it should
increase one’s confidence. That has been true for me since my big crash, which
is why I’ve been able to have more success with less risk.
Becoming truly open-minded takes time. Like all real learning, doing this is
largely a matter of habit; once you do it so many times it is almost instinctive,
you’ll find it intolerable to be any other way. As noted earlier, this typically
takes about eighteen months, which in the course of a lifetime is nothing.
ARE YOU UP FOR THE CHALLENGE?
For me, there is really only one big choice to make in life: Are you willing to
fight to find out what’s true? Do you deeply believe that finding out what is true
is essential to your well-being? Do you have a genuine need to find out if you or
others are doing something wrong that is standing in the way of achieving your
goals? If your answer to any of these questions is no, accept that you will never
live up to your potential. If, on the other hand, you are up for the challenge of
becoming radically open-minded, the first step in doing so is to look at yourself
objectively. In the next chapter, Understand That People Are Wired Very
Differently, you’ll have a chance to do just that.

25 The brain is a highly interconnected organ with many different structures responsible for producing our
thoughts, feelings, and actions. When explaining these things, I’ve adopted some conventions, such as
describing the amygdala as the sole cause of emotional flight-or-fight reactions, even though the exact
neuroanatomy is more complex. I’ll cover this in more detail in the following chapter.
26 One way to do this is by asking questions like “Would you rather I be open with my thoughts and
questions or keep them to myself?”; “Are we going to try to convince each other that we are right or are we
going to open-mindedly hear each other’s perspectives to try to figure out what’s true and what to do about
it?”; or “Are you arguing with me or seeking to understand my perspective?”
27 Psychologist and science journalist Daniel Goleman originally coined this term in Emotional
Intelligence.
28 Some of this may be a result of what is called the Dunning-Kruger effect, a cognitive bias in which lowability individuals believe that they are in fact superior.
4 Understand That People Are Wired
Very Differently
Because of the different ways that our brains are wired, we all experience reality
in different ways and any single way is essentially distorted. This is something
that we need to acknowledge and deal with. So if you want to know what is true
and what to do about it, you must understand your own brain.
That insight led me to talk with many psychologists, psychiatrists,
neuroscientists, personality testers, and other believable people in the field, and
it led me to read many books. I discovered that though it is obvious to all of us
that we are born with different strengths and weaknesses in areas such as
common sense, creativity, memory, synthesis, attention to detail, and so forth,
examining these differences objectively makes even most scientists
uncomfortable. But that doesn’t make it any less necessary, so I pushed forward
with these explorations over several decades.
As a result, I have learned a lot that helped me and that I believe can help
you. In fact, I attribute as much of my success to what I’ve learned about the
brain as I do to my understanding of economics and investing. In this chapter, I
will share some of the amazing things I’ve learned.
WHY I TURNED TO NEUROSCIENCE
When I started Bridgewater two years out of business school, I had to manage
people for the first time. At first I thought that hiring smart people—for instance,
the top students out of the top schools—should get me capable employees, but as
often as not, those people didn’t turn out well. “Book smarts” didn’t typically
equate to the type of smarts I needed.
I wanted to work with independent thinkers who were creative, conceptual,
and had a lot of common sense. But I had a hard time finding those sorts of
people and even when I did, I was shocked at how differently their brains
seemed to work. It was as though we were speaking different languages. For
example, those who were “conceptual” and imprecise spoke one language while
those who were literal and precise spoke another. At the time, we chalked this up
to “communication problems,” but the differences were much deeper than that—
and they were painful for all of us, particularly when we were trying to achieve
big things together.
I remember one research project—an ambitious attempt to systemize our
global understanding of the bond markets—that took place years ago. Bob
Prince was running it, and while we agreed conceptually on what we were trying
to do, the project didn’t get pushed through to results. We’d meet with Bob and
his team to agree on the goal and lay out how to get there. But when they’d go
off to work on it, they’d make no progress. The problem was that conceptual
people who visualized what should be done in vague ways expected more literal
people to figure out for themselves how to do it. When they didn’t, the more
conceptual people thought the more literal people had no imagination, and the
more literal people thought the more conceptual people had their heads in the
clouds. To make matters worse, none of them knew which were which—the
more literal people thought that they were as conceptual as the conceptual people
and vice versa. In short, we were gridlocked, and everyone thought it was
someone else’s fault—that the people they were locking horns with were blind,
stubborn, or just plain stupid.
Those meetings were painful for everyone. Because no one was clear about
what they were good or bad at, everybody expressed opinions about everything
and there wasn’t any sensible way of sorting through them. We discussed why
the group was failing, which led us to see that the individuals Bob had chosen
for his team reflected his own strengths and weaknesses in their own roles.
While that took frankness and open-mindedness and was a big step forward, it
wasn’t recorded and systematically converted into adequate changes, so the
same people kept making the same sort of mistakes, over and over again.
Isn’t it obvious that our different ways of thinking, our emotional responses,
and our not having ways of dealing with them is crippling us? What are we
supposed to do, not deal with them?
I’m sure you’ve been in contentious disagreements before—ones where
people have different points of view and can’t agree on what’s right. Good
people with good intentions get angry and emotional; it is frustrating and often
becomes personal. Most companies avoid this by suppressing open debate and
having those with the most authority simply make the calls. I didn’t want that
kind of company. I knew we needed to dig more deeply into what was
preventing us from working together more effectively, bring those things to the
surface, and explore them.
Bridgewater’s roughly 1,500 employees do many different things—some
strive to understand the global markets; others develop technologies; still others
serve clients, manage health insurance and other benefits for employees, provide
legal guidance, manage IT and facilities, and so on. All these activities require
different types of people to work together in ways that harvest the best ideas and
throw away the worst. Organizing people to complement their strengths and
compensate for their weaknesses is like conducting an orchestra. It can be
magnificent if done well and terrible if done poorly.
While “know thyself” and “to thine own self be true” are fundamental tenets I
had heard long before I began looking into the brain, I had no idea how to go
about getting that knowledge or how to act on it until we made these discoveries
about how people think differently. The better we know ourselves, the better we
can recognize both what can be changed and how to change it, and what can’t be
changed and what we can do about that. So no matter what you set out to do—
whether on your own, as a member of an organization, or as its director—you
need to understand how you and other people are wired.
4.1 Understand the power that comes from knowing
how you and others are wired.
As I related in the first part of this book, my first breakthrough in understanding
how people think differently occurred when I was a young father and had my
kids tested by Dr. Sue Quinlan. I found the results remarkable, because she not
only confirmed my own observations of the ways that their minds were working
at the time but also predicted how they would develop in the future. For
example, one of my kids was struggling with arithmetic. Because he tested well
in mathematical reasoning, she correctly told him that if he pushed through the
boredom of rote memorization required in elementary school, he would love the
higher-level concepts he would be exposed to when he got older. These insights
opened my eyes to new possibilities. I turned to her and others years later when I
was trying to figure out the different thinking styles of my employees and
colleagues.
At first, the experts gave me both bad and good advice. Many seemed as if
they were more interested in making people feel good (or not feel bad) than they
were at getting at the truth. Even more startling, I found that most psychologists
didn’t know much about neuroscience and most neuroscientists didn’t know
much about psychology—and both were reluctant to connect the physiological
differences in people’s brains to the differences in their aptitudes and behaviors.
But eventually I found Dr. Bob Eichinger, who opened the world of
psychometric testing to me. Using Myers-Briggs and other assessments, we
evolved a much clearer and more data-driven way of understanding our different
types of thinking.
Our differences weren’t a product of poor communication; it was the other
way around. Our different ways of thinking led to our poor communications.
From conversations with experts and my own observations, I learned that
many of our mental differences are physiological. Just as our physical attributes
determine the limits of what we are able to do physically—some people are tall
and others are short, some muscular and others weak—our brains are innately
different in ways that set the parameters of what we are able to do mentally. As
with our bodies, some parts of our brains cannot be materially affected by
external experience (in the same way that your skeleton isn’t changed much
through working out), while other parts can be strengthened through exercise (I
will have more to say about brain plasticity later in this chapter).
This was driven home to me by my son Paul’s three-year struggle with
bipolar disorder. As terrifying and frustrating as his behavior was, I came to
realize that it was due to his brain’s chemistry (specifically, its secreting
serotonin and dopamine in spurts and sputters). As I went through that terrible
journey with him, I experienced the frustration and anger of trying to reason with
someone who wasn’t thinking well. I constantly had to remind myself that there
was no basis for my anger because his distorted logic was a product of his
physiology—and I saw for myself how the doctors who approached it that way
brought him to a state of crystal clarity. The experience not only taught me a lot
about how brains work but why creative genius often exists at the edge of
insanity. Many highly productive and creative people have suffered from bipolar
disorder, among them Ernest Hemingway, Beethoven, Tchaikovsky, Vincent van
Gogh, Jackson Pollock, Virginia Woolf, Winston Churchill, and the psychologist
Kay Redfield Jamison (who has written frankly about her own experiences with
the disease in her book An Unquiet Mind). I learned that we are all different
because of the different ways that the machine that is our brain works—and that
nearly one in five Americans are clinically mentally ill in one way or another.
Once I understood that it’s all physiological, many things became clearer to
me. While I used to get angry and frustrated at people because of the choices
they made, I came to realize that they weren’t intentionally acting in a way that
seemed counterproductive; they were just living out things as they saw them,
based on how their brains worked. I also realized that as off-base as they seemed
to me, they saw me the same way. The only sensible way of behaving with each
other was to look down upon ourselves with mutual understanding so we could
make objective sense of things. Not only did this make our disagreements less
frustrating, it also allowed us to maximize our effectiveness.
Everyone is like a Lego set of attributes, with each piece reflecting the
workings of a different part of their brain. All these pieces come together to
determine what each person is like, and if you know what a person is like, you’ll
have a pretty good idea of what you can expect from them.
a. We are born with attributes that can both help us and hurt us, depending on their
application. Most attributes are a double-edged sword that bring potential benefits
and potential harm. The more extreme the attribute, the more extreme the
potential good or bad outcomes it is likely to produce. For example, a highly
creative, goal-oriented person good at imagining new ideas might undervalue the
minutiae of daily life, which is also important; he might be so driven in his
pursuit of long-term goals that he might have disdain for people who focus on
the details of daily life. Similarly, a task-oriented person who is great with
details might undervalue creativity—and worse still, may squelch it in the
interests of efficiency. These two people might make a great team, but are likely
to have trouble taking advantage of the ways they’re complementary, because
the ways their minds work make it difficult for them to see the value of each
other’s ways of thinking.
Having expectations for people (including yourself) without knowing what
they are like is a sure way to get in trouble. I learned this the hard way, through
years of frustrating conversations and the pain of expecting things from people
who were constitutionally incapable of delivering them. I’m sure that I caused
them plenty of pain too. Over time, I realized that I needed a systematic
approach to capturing and recording our differences so that we could actively
take them into consideration when putting people into different roles at
Bridgewater.
This led to one of my most valuable management tools: Baseball Cards,
which I mentioned in the first part of this book. Just as a baseball card compiles
the relevant data on a baseball player, helping fans know what that player is
good and bad at, I decided that it would be similarly helpful for us to have cards
for all of our players at Bridgewater.
In creating the attributes for our baseball cards, I used a combination of
adjectives we already used to describe people, like “conceptual,” “reliable,”
“creative,” and “determined”; the actions people took or didn’t take such as
“holding others accountable” and “pushing through to results”; and terms from
personality tests such as “extroverted” or “judging.” Once the cards were
established, I created a process to have people evaluate each other, with the
people rated highest in each dimension (e.g., “most creative”) having more
weight on the ratings of other people in that dimension. People with proven track
records in a certain area would get more believability, or decision-making
weight, within that area. By recording these qualities in people’s Baseball Cards,
others who’d never worked with them before could know what to expect from
them. When people changed, their rating would change. And when they didn’t
change, we were even more sure of what we could expect of them.
Naturally when I introduced this tool, people were skeptical or scared of it for
various reasons. Some were afraid that the cards would be inaccurate; others
thought it would be uncomfortable to have their weaknesses made so apparent,
or that it would lead to their being pigeonholed, inhibiting their growth; still
others thought it would be too complex to be practical. Imagine how you would
feel if you were asked to force-rank all your colleagues on creativity,
determination, or reliability. Most people at first find that prospect frightening.
Still, I knew that we needed to be radically open in recording and considering
what people were like, and that things would eventually evolve to address
people’s concerns if we were sensible about how we approached the process.
Today, most everyone at Bridgewater finds these Baseball Cards to be essential,
and we have built a whole suite of other tools, which will be further described in
Work Principles, to support our drive to understand what people are like and
who is believable at what.
I’ve already noted that our unique way of operating and the treasure trove of
data we accumulated brought us to the attention of some world-renowned
organizational psychologists and researchers. Bob Kegan of Harvard University,
Adam Grant of the Wharton School, and Ed Hess of the University of Virginia
have written about us extensively, and I have learned a great deal from them in
turn. In a way I never intended, our trial-and-error discovery process has put us
at the cutting edge of academic thinking about personal development within
organizations. As Kegan wrote in his book An Everyone Culture, “from the
individual experience of probing in every one-on-one meeting, to the
technologically integrated processes for discussing . . . issues and baseball cards,
to the company-wide practices of daily updates and cases, Bridgewater has built
an ecosystem to support personal development. The system helps everyone in
the company confront the truth about what everyone is like.”
Our journey of discovery has coincided with an incredibly fertile epoch in
neuroscience, when, thanks to rapid advances in brain imaging and the ability to
gather and process big data, our understanding has accelerated dramatically. As
with all sciences on the cusp of breakthroughs, I am sure that much of what is
thought to be true today will soon be radically improved. But what I do know is
how incredibly beautiful and useful it is to understand how the thinking machine
between our ears works.
Here’s some of what I’ve learned:
The brain is even more complex than we can imagine. It has an estimated
eighty-nine billion tiny computers (called neurons) that are connected to each
other through many trillions of “wires” called axons and chemical synapses. As
David Eagleman describes it in his wonderful book Incognito:
Your brain is built of cells called neurons and glia—hundreds of billions of
them. Each one of them is as complex as a city. . . . The cells [neurons] are
connected in a network of such staggering complexity that it bankrupts
human language and necessitates new strains of mathematics. A typical
neuron makes about ten thousand connections to neighboring neurons.
Given billions of neurons, this means that there are as many connections in a
single cubic centimeter of brain tissue as there are stars in the Milky Way
galaxy.
When we are born our brains are preprogrammed with learning accumulated
over hundreds of millions of years. For example, researchers at the University of
Virginia have shown that while many people have an instinctual fear of snakes,
no one has an instinctual fear of flowers. The brains that we were born with had
learned that snakes are dangerous and flowers are not. There’s a reason for that.
There is one grand design for the brains of all mammals, fish, birds,
amphibians, and reptiles, which was established nearly 300 million years ago
and has been evolving ever since. Just as cars have evolved into different
versions—sedans, SUVs, sports cars, etc.—that rely on many of the same
underlying parts, all vertebrate brains have similar parts that do similar things
but that are well adapted to the needs of their own particular species. For
example, birds have superior occipital lobes because they need to spot prey (and
predators) from great heights. While we humans think of ourselves as superior
overall because we overemphasize the importance of our own advantages, other
species could justifiably make the same claims on their own behalf—birds for
flight, eyesight, and instinctual magnetic navigation; most animals for smell; and
several for appearing to have particularly enjoyable sex.
This “universal brain” has evolved from the bottom up, meaning that its lower
parts are evolutionarily the oldest and the top parts are the newest. The brainstem
controls the subconscious processes that keep us and other species alive—
heartbeat, breathing, nervous system, and our degree of arousal and alertness.
The next layer up, the cerebellum, gives us the ability to control our limb
movements by coordinating sensory input with our muscles. Then comes the
cerebrum, which includes the basal ganglia (which controls habit) and other
parts of the limbic system (which controls emotional responses and some
movement) and the cerebral cortex (which is where our memories, thoughts, and
sense of consciousness reside). The newest and most advanced part of the cortex,
that wrinkled mass of gray matter that looks like a bunch of intestines, is called
the neocortex, which is where learning, planning, imagination, and other higherlevel thoughts come from. It accounts for a significantly higher ratio of the
brain’s gray matter than is found in the brains of other species.
4.2 Meaningful work and meaningful relationships
aren’t just nice things we chose for ourselves—
they are genetically programmed into us.
Neuroscientists, psychologists, and evolutionists agree the human brain comes
pre-programmed with the need for and enjoyment of social cooperation. Our
brains want it and develop better when we have it. The meaningful relationships
we get from social cooperation make us happier, healthier, and more productive;
social cooperation is also integral to effective work. It is one of the defining
characteristics of being human.29
Leonard Mlodinow, in his excellent book Subliminal, writes, “We usually
assume that what distinguishes us [from other species] is IQ. But it is our social
IQ that ought to be the principal quality that differentiates us.” He points out that
humans have a unique ability to understand what other people are like and how
they are likely to behave. The brain comes programmed to develop this ability;
by the time they are four years old, most children are able to read others’ mental
states. This sort of human understanding and cooperation is what makes us so
accomplished as a species. As Mlodinow explains, “Building a car for example
requires the participation of thousands of people with diverse skills, in diverse
lands, performing diverse tasks. Metals like iron must be extracted from the
ground and processed; glass, rubber, and plastics must be created from numerous
chemical precursors and molded; batteries, radiators and countless other parts
must be produced; electronic and mechanical systems must be designed; and it
all must come together, coordinated from far and wide, in one factory so that the
car can be assembled. Today, even the coffee and bagel you might consume
while driving to work in the morning is the result of the activities of people all
over the world.”
In his book The Meaning of Human Existence, Pulitzer Prize–winning author
Edward O. Wilson surmises that between one million and two million years ago,
when our ancestors were somewhere between chimpanzees and modern homo
sapiens, the brain evolved in ways supporting cooperation so man could hunt
and do other activities. This led the centers of memory and reasoning in the
prefrontal cortex to develop beyond those of our primate relatives. As groups
became more powerful than individuals and our brains evolved in ways that
made larger groups manageable, competition between groups became more
important than competition between individuals and groups that had more
cooperative individuals did better than those without them. This evolution led to
the development of altruism, morality, and the sense of conscience and honor.
Wilson explains that man is perpetually suspended between the two extreme
forces that created us: “Individual selection [which] prompted sin and group
selection [which] promoted virtue.”
Which of these forces (self-interest or collective interest) wins out in any
organization is a function of that organization’s culture, which is a function of
the people who shape it. But it’s clear that collective interest is what’s best, not
just for the organization but for the individuals who make it up. As I’ll explain in
Work Principles, the rewards of working together to make the pie bigger are
greater than the rewards of self-interest, not only in terms of how much “pie”
one gets but also in the psychic rewards wired into our brains that make us
happier and healthier.
Knowing how the brain has evolved thus far, we might extrapolate the past
into the future to imagine where it will go. Clearly the evolution of the brain has
moved from being nonthinking and self-focused toward being more abstract and
more universally focused. For example, the brain evolution that I described has
given us (some people more than others) the ability to see ourselves and our
circumstances from a higher holistic level and, in some cases, to value the whole
that we are part of even more than ourselves.
A few years ago, I had a conversation with the Dalai Lama in which I
explained to him the contemporary neuroscience view that all of our thinking
and feeling is due to physiology (in other words, the chemicals, electricity, and
biology in our brains working like a machine). This implied that spirituality is
due to these physiological mechanics rather than something coming from above,
so I asked him what he thought about that. Without hesitation, he responded
“Absolutely!” and told me that the next day he was meeting with the University
of Wisconsin professor of neuroscience who had helped him learn about this,
and he asked me if I wanted to join him. Regrettably, I couldn’t but I
recommended to him a book I’d read on the subject called The Spiritual Brain
(which I also recommend to you). In our conversation, we went on to discuss the
similarities and differences between spirituality and religion. His view was that
prayer and meditation seemed to have similar effects on the brain in producing
feelings of spirituality (the rising above oneself to feel a greater connection to
the whole) but that each religion adds its own different superstitions on top of
that common feeling of spirituality. Rather than trying to squeeze my own
summary of his thinking in here, I’ll simply recommend the Dalai Lama’s book,
Beyond Religion, if you’re interested in learning more.
In imagining what the future of our thinking will be like, it’s also interesting
to consider how man himself might change how the brain works. We are
certainly doing that with drugs and technology. Given advances in genetic
engineering, it’s reasonable to expect that someday genetic engineers might mix
and match features of different species’ brains for different purposes—if you
want to have a heightened sense of sight, say, genetic engineers might be able to
manipulate the human brain so it grows optic lobes more like those of birds. But
since such things won’t happen anytime soon, let’s get back to the practical
question of how all this can help us better deal with ourselves and each other.
4.3 Understand the great brain battles and how to
control them to get what “you” want.
The following sections explore the different ways your brain fights for control of
“you.” While I will refer to the specific parts of the brain that neurophysiologists
believe are responsible for specific types of thinking and emotions, the actual
physiology is much more complex—and scientists are only beginning to
understand it.
a. Realize that the conscious mind is in a battle with the subconscious mind. Earlier in
the book, I introduced the concept of the “two yous” and explained how your
higher-level you can look down on your lower-level you to make sure that your
lower-level you isn’t sabotaging what your higher-level you wants. Though I’ve
often seen these two yous in action in myself and others, it wasn’t until I learned
why they exist that I really understood them.
As with animals, many of our decision-making drivers are below the surface.
An animal doesn’t “decide” to fly or hunt or sleep or fight in the way that we go
about making many of our own choices of what to do—it simply follows the
instructions that come from the subconscious parts of its brain. These same sorts
of instructions come to us from the same parts of our brains, sometimes for good
evolutionary reasons and sometimes to our detriment. Our subconscious fears
and desires drive our motivations and actions through emotions such as love,
fear, and inspiration. It’s physiological. Love, for example, is a cocktail of
chemicals (such as oxytocin) secreted by the pituitary gland.
While I had always assumed that logical conversation is the best way for
people to get at what is true, armed with this new knowledge about the brain, I
came to understand that there are large parts of our brains that don’t do what is
logical. For example, I learned that when people refer to their “feelings”—such
as saying “I feel that you were unfair with me”—they are typically referring to
messages that originate in the emotional, subconscious parts of their brains. I
also came to understand that while some subconscious parts of our brains are
dangerously animalistic, others are smarter and quicker than our conscious
minds. Our greatest moments of inspiration often “pop” up from our
subconscious. We experience these creative breakthroughs when we are relaxed
and not trying to access the part of the brain in which they reside, which is
generally the neocortex. When you say, “I just thought of something,” you
noticed your subconscious mind telling your conscious mind something. With
training, it’s possible to open this stream of communication.
Many people only see the conscious mind and aren’t aware of the benefits of
connecting it to the subconscious. They believe that the way to accomplish more
is to cram more into the conscious mind and make it work harder, but this is
often counterproductive. While it may seem counterintuitive, clearing your head
can be the best way to make progress.
Knowing this, I now understand why creativity comes to me when I relax
(like when I’m in the shower) and how meditation helps open this connection.
Because it is physiological, I can actually feel the creative thoughts coming from
elsewhere and flowing into my conscious mind. It’s a kick to understand how
that works.
But a note of caution is in order too: When thoughts and instructions come to
me from my subconscious, rather than acting on them immediately, I have gotten
into the habit of examining them with my conscious, logical mind. I have found
that in addition to helping me figure out which thoughts are valid and why I am
reacting to them as I do, doing this opens further communication between my
conscious and subconscious minds. It’s helpful to write down the results of this
process. In fact that’s how my Principles came about.
If you take nothing else away from this chapter, be aware of your
subconscious—of how it can both harm you and help you, and how by
consciously reflecting on what comes out of it, perhaps with the help of others,
you can become happier and more effective.
b. Know that the most constant struggle is between feeling and thinking. There are no
greater battles than those between our feelings (most importantly controlled by
our amygdala, which operates subconsciously) and our rational thinking (most
importantly controlled by our prefrontal cortex, which operates consciously). If
you understand how those battles occur you will understand why it is so
important to reconcile what you get from your subconscious with what you get
from your conscious mind.
That damned amygdala, which is a little almond-shaped structure that lies
deeply embedded in the cerebrum, is one of the most powerful parts of your
brain. It controls your behavior, even though you’re not conscious of it. How
does it work? When something upsets us—and that something could be a sound,
a sight, or just a gut feeling—the amygdala sends notice to our bodies to prepare
to fight or flee: the heartbeat speeds up, the blood pressure rises, and breathing
quickens. During an argument, you’ll often notice a physical response similar to
how you react to fear (for instance, rapid heartbeats and tensing muscles).
Recognizing that, your conscious mind (which resides in the prefrontal cortex)
can refuse to obey its instructions. Typically, these amygdala hijackings come on
fast and dissipate quickly, except in rare cases, such as when a person develops
post-traumatic stress disorder from a particularly horrible event or series of
events. Knowing how these hijackings work, you know that if you allow
yourself to react spontaneously, you will be prone to overreact. You can also
comfort yourself with the knowledge that whatever psychological pain you are
experiencing will go away before very long.
c. Reconcile your feelings and your thinking. For most people, life is a never-ending
battle between these two parts of the brain. While the amygdala’s reactions come
in spurts and then subside, reactions from the prefrontal cortex are more gradual
and constant. The biggest difference between people who guide their own
personal evolution and achieve their goals and those who don’t is that those who
make progress reflect on what causes their amygdala hijackings.
d. Choose your habits well. Habit is probably the most powerful tool in your brain’s
toolbox. It is driven by a golf-ball-sized lump of tissue called the basal ganglia at
the base of the cerebrum. It is so deep-seated and instinctual that we are not
conscious of it, though it controls our actions.
If you do just about anything frequently enough over time, you will form a
habit that will control you. Good habits are those that get you to do what your
“upper-level you” wants, and bad habits are those that are controlled by your
“lower-level you” and stand in the way of your getting what your “upper-level
you” wants. You can create a better set of habits if you understand how this part
of your brain works. For example, you can develop a habit that will make you
“need” to work out at the gym.
Developing this skill takes some work. The first step is recognizing how
habits develop in the first place. Habit is essentially inertia, the strong tendency
to keep doing what you have been doing (or not doing what you have not been
doing). Research suggests that if you stick with a behavior for approximately
eighteen months, you will build a strong tendency to stick to it nearly forever.
For a long time, I didn’t appreciate the extent to which habits control people’s
behavior. I experienced this at Bridgewater in the form of people who agreed
with our work principles in the abstract but had trouble living by them; I also
observed it with friends and family members who wanted to achieve something
but constantly found themselves working against their own best interests.
Then I read Charles Duhigg’s best-selling book The Power of Habit, which
really opened my eyes. I recommend that you read it yourself if your interest in
this subject goes deeper than what I’m able to cover here. Duhigg’s core idea is
the role of the three-step “habit loop.” The first step is a cue—some “trigger that
tells your brain to go into automatic mode and which habit to use,” according to
Duhigg. Step two is the routine, “which can be physical or mental or emotional.”
Finally, there is a reward, which helps your brain figure out if this particular loop
is “worth remembering for the future.” Repetition reinforces this loop until over
time it becomes automatic. This anticipation and craving is the key to what
animal trainers call operant conditioning, which is a method of training that uses
positive reinforcement. For example, dog trainers use a sound (typically a
clicker) to reinforce behavior by pairing that sound with a more desirable reward
(typically food) until the dog will perform the desired behavior when it merely
hears the click. In humans, Duhigg says, rewards can be just about anything,
ranging “from food or drugs that cause physical sensations, to emotional
payoffs, such as the feelings of pride that accompany praise or selfcongratulation.”
Habits put your brain on “automatic pilot.” In neuroscientific terms, the basal
ganglia takes over from your cortex, so that you can execute activities without
even thinking about them.
Reading Duhigg’s book taught me that if you really want to change, the best
thing you can do is choose which habits to acquire and which to get rid of and
then go about doing that. To help you, I recommend that you write down your
three most harmful habits. Do that right now. Now pick one of those habits and
be committed to breaking it. Can you do that? That would be extraordinarily
impactful. If you break all three, you will radically improve the trajectory of
your life. Or you can pick habits that you want to acquire and then acquire them.
The most valuable habit I’ve acquired is using pain to trigger quality
reflections. If you can acquire this habit yourself, you will learn what causes
your pain and what you can do about it, and it will have an enormous impact on
your effectiveness.
e. Train your “lower-level you” with kindness and persistence to build the right habits. I
used to think that the upper-level you needed to fight with the lower-level you to
gain control, but over time I’ve learned that it is more effective to train that
subconscious, emotional you the same way you would teach a child to behave
the way you would like him or her to behave—with loving kindness and
persistence so that the right habits are acquired.
f. Understand the differences between right-brained and left-brained thinking. Just as
your brain has its conscious upper part and its subconscious lower part, it also
has two halves called hemispheres.30 You might have heard it said that some
people are more left-brained while others are more right-brained. That’s not just
a saying—Caltech professor Roger Sperry won the Nobel Prize in medicine for
discovering it. In a nutshell:
1. The left hemisphere reasons sequentially, analyzes details, and excels at
linear analysis. “Left-brained” or “linear” thinkers who are analytically
strong are often called “bright.”
2. The right hemisphere thinks across categories, recognizes themes, and
synthesizes the big picture. “Right-brained” or “lateral” thinkers with more
street smarts are often called “smart.”
The diagram on the left summarizes the qualities of “right-brained” and “leftbrained” thinking types.
Most people tend to get more of their instructions from one side than the
other and they have trouble understanding people who get theirs from the
opposite side. Our experience has been that left-brained folks tend to see rightbrained folks as “spacey” or “abstract,” while right-brained thinkers tend to find
left-brained thinkers “literal” or “narrow.” I have seen wonderful results occur
when people know where their own and others’ inclinations lie, realize that both
ways of thinking are invaluable, and assign responsibilities accordingly.
g. Understand how much the brain can and cannot change. This brings us to an
important question: Can we change?31 We can all learn new facts and skills, but
can we also learn to change how we are inclined to think? The answer is a
qualified yes.
Brain plasticity is what allows your brain to change its “softwiring.” For a
long time, scientists believed that after a certain critical period in childhood,
most of our brain’s neurological connections were fixed and highly unlikely to
change. But recent research has suggested that a wide variety of practices—from
physical exercise to studying to meditation—can lead to physical and
physiological changes in our brains that affect our abilities to think and form
memories. In a study of Buddhist monks who had practiced more than ten
thousand hours of meditation, researchers at the University of Wisconsin
measured significantly higher levels of gamma waves in their brains; these
waves are associated with perception and problem solving.32
That doesn’t mean the brain is infinitely flexible. If you have a preference for
a certain way of thinking, you might be able to train yourself to operate another
way and find that easier to do over time, but you’re very unlikely to change your
underlying preference. Likewise, you may be able to train yourself to be more
creative, but if you’re not naturally creative, there’s likely a limit to what you
can do. That is simply reality, so we all might as well accept it and learn how to
deal with it. There are coping techniques that we can use—for example, the
creative, disorganized person who is likely to lose track of time can develop the
habit of using alarms; the person who isn’t good at some type of thinking can
train himself to rely on the thinking of others who are better at it. The best way
to change is through doing mental exercises. As with physical exercise, this can
be painful unless you enlist the habit loop discussed earlier to connect the
rewards to the actions, “rewiring” your brain to love learning and beneficial
change.
Remember that accepting your weaknesses is contrary to the instincts of those
parts of your brain that want to hold on to the illusion that you are perfect. Doing
the things that will reduce your instinctual defensiveness takes practice, and
requires operating in an environment that reinforces open-mindedness.
As you’ll see when we get into Work Principles, I’ve developed a number of
tools and techniques that help overcome that resistance, individually and across
organizations. Instead of expecting yourself or others to change, I’ve found that
it’s often most effective to acknowledge one’s weaknesses and create explicit
guardrails against them. This is typically a faster and higher-probability path to
success.
4.4 Find out what you and others are like.
Because of the biases with which we are wired, our self-assessments (and our
assessments of others) tend to be highly inaccurate. Psychometric assessments
are much more reliable. They are important in helping explore how people think
during the hiring process and throughout employment. Though psychometric
assessments cannot fully replace speaking with people and looking at their
backgrounds and histories, they are far more powerful than traditional
interviewing and screening methods. If I had to choose between just the
assessments or just traditional job interviews to get at what people are like, I
would choose the assessments. Fortunately, we don’t have to make that choice.
The four main assessments we use are the Myers-Briggs Type Indicator
(MBTI), the Workplace Personality Inventory, the Team Dimensions Profile,
and Stratified Systems Theory.33 But we are constantly experimenting (for
example, with the Big Five) so our mix will certainly change. Whatever the mix,
they all convey people’s preferences for thinking and action. They also provide
us with new attributes and terminologies that clarify and amplify those we had
identified on our own. I will describe a few of them below. These descriptions
are based on my own experiences and learnings, which are in many ways
different from the official descriptions used by the assessment companies.34
a. Introversion vs. extroversion. Introverts focus on the inner world and get their
energy from ideas, memories, and experiences while extroverts are externally
focused and get their energy from being with people. Introversion and
extroversion are also linked to differences in communication styles. If you have
a friend who loves to “talk out” ideas (and even has trouble thinking through
something if there isn’t someone around to work it through with), he or she is
likely an extrovert. Introverts will usually find such conversations painful,
preferring to think privately and share only after they’ve worked things out on
their own. I’ve found that it is important to help each communicate in the way
that they feel most comfortable. For example, introverts often prefer
communicating in writing (such as email) rather than speaking in group settings
and tend to be less open with their critical thoughts.
b. Intuiting vs. sensing. Some people see big pictures (forests) and others see
details (trees). In the Myers-Briggs framework, these ways of seeing are best
represented by the continuum from intuiting to sensing. You can get an idea of
people’s preferences by observing what they focus on. For example, when
reading, a sensing person who focuses on details can be thrown off by typos
such as “there” instead of “their,” while intuitive thinkers won’t even notice the
mistake. That is because the intuitive thinker’s attention is focused on the
context first and the details second. Naturally, you’d rather have a sensing
person than an intuitor preparing your legal documents, where every “i” must be
properly dotted and every “t” crossed just so.
c. Thinking vs. feeling. Some people make decisions based on logical analysis of
objective facts, considering all the known, provable factors important to a given
situation and using logic to determine the best course of action. This approach is
an indicator of a preference for thinking and is how you’d hope your doctor
thinks when he makes a diagnosis. Other people—who prefer feeling—focus on
harmony between people. They are better suited to roles that require lots of
empathy, interpersonal contact, and relationship building, for example HR and
customer service. Before we had assessments to identify these differences,
conversations between “Ts” and “Fs” were really frustrating. Now we laugh as
we bump up against our differences, because we know what they are and can see
them playing out in classic ways.
d. Planning vs. perceiving. Some people like to live in a planned, orderly way and
others prefer flexibility and spontaneity.35 Planners (or “Judgers” in MyersBriggs terms) like to focus on a plan and stick with it, while perceivers are prone
to focus on what’s happening around them and adapt to it. Perceivers work from
the outside in; they see things happening and work backward to understand the
cause and how to respond; they also see many possibilities that they compare
and choose from—often so many that they are confused by them. In contrast,
planners work from the inside out, first figuring out what they want to achieve
and then how things should unfold. Planners and perceivers have trouble
appreciating each other. Perceivers see new things and change direction often.
This is discomforting to planners, who weigh precedent much more heavily in
their decision making, and assume if it was done in a certain way before, it
should be done in the same way again. Similarly, planners can discomfort
perceivers by being seemingly rigid and slow to adapt.
e. Creators vs. refiners vs. advancers vs. executors vs. flexors. By identifying talents
and preferences that lead people to feel a particular way, you can place them in
jobs at which they will likely excel. At Bridgewater, we use a test called the
“Team Dimensions Profile” (TDP) to connect people with their preferred role.
The five types identified by the TDP are Creators, Refiners, Advancers,
Executors, and Flexors.
• Creators generate new ideas and original concepts. They prefer unstructured
and abstract activities and thrive on innovation and unconventional practices.
• Advancers communicate these new ideas and carry them forward. They
relish feelings and relationships and manage the human factors. They are
excellent at generating enthusiasm for work.
• Refiners challenge ideas. They analyze projects for flaws, then refine them
with a focus on objectivity and analysis. They love facts and theories and
working with a systematic approach.
• Executors can also be thought of as Implementers. They ensure that
important activities are carried out and goals accomplished; they are focused
on details and the bottom line.
• Flexors are a combination of all four types. They can adapt their styles to fit
certain needs and are able to look at a problem from a variety of
perspectives.
Triangulating what I learn from each test reinforces or raises questions about
the pictures of people I’m forming in my head. For example, when people’s
MBTI results suggest a preference for “S” (focus on details) and “J” (planful),
and they come out as executors on the Team Dimension assessment, there is a
very good chance that they are more detail-focused than right-brained and
imaginative, which means that they would likely fit better in jobs that have less
ambiguity and more structure and clarity.
f. Focusing on tasks vs. focusing on goals. Some people are focused on daily tasks
while others are focused on their goals and how to achieve them. I’ve found
these differences to be quite similar to the differences between people who are
intuitive vs. sensing. Those who tend to focus on goals and “visualize” best can
see the big pictures over time and are also more likely to make meaningful
changes and anticipate future events. These goal-oriented people can step back
from the day-to-day and reflect on what and how they’re doing. They are the
most suitable for creating new things (organizations, projects, etc.) and
managing organizations that have lots of change. They typically make the most
visionary leaders because of their ability to take a broad view and see the whole
picture.
In contrast, those who tend to focus on daily tasks are better at managing
things that don’t change much or that require processes to be completed reliably.
Task-oriented people tend to make incremental changes that reference what
already exists. They are slower to depart from the status quo and more likely to
be blindsided by sudden events. On the other hand, they’re typically more
reliable. Although it may seem that their focus is narrower than higher-level
thinkers, the roles they play are no less critical. I would never have gotten this
book out or accomplished hardly anything else worthwhile if I didn’t work with
people who are wonderful at taking care of details.
g. Workplace Personality Inventory. Another assessment we use is the Workplace
Personality Inventory, a test based on data from the U.S. Department of Labor. It
anticipates behavior and predicts job fit and satisfaction, singling out certain key
characteristics/qualities, including persistence, independence, stress tolerance,
and analytical thinking. This test helps us understand what people value and how
they will make trade-offs between their values. For example, someone with low
Achievement Orientation and high Concern for Others might be unwilling to
step on others’ toes in order to accomplish their goals. Likewise, someone who
is bad at Rule Following may be more likely to think independently.
We have found that something like twenty-five to fifty attributes can pretty
well describe what a person is like. Each one comes in varying degrees of
strength (like color tones). If you know what they are and put them together
correctly, they will paint a pretty complete picture of a person. Our objective is
to use test results and other information to try to do just that. We prefer to do it
in partnership with the person being looked at, because it helps us be more
accurate and at the same time it’s very helpful to them to see themselves
objectively.
Certain attributes combine frequently to produce recognizable archetypes. If
you think about it, you can probably come up with a handful of archetypal
people you meet over and over again in life: the spacey, impractical Artist; the
tidy Perfectionist; the Crusher who runs through brick walls to get things done;
the Visionary who pulls amazing big ideas seemingly out of the air. Over time I
came up with a list of others, including Shaper, Chirper, Tweaker, and OpenMinded Learner, as well as Advancer, Creator, Cat-Herder, Gossiper, Loyal
Doer, Wise Judge, and others.
To be clear, archetypes are less useful than the better fleshed-out pictures
created through the assessments. They are not precise; they are more like simple
caricatures, but they can be useful when it comes to assembling teams.
Individual people will always be more complex than the archetypes that describe
them, and they may well match up with more than one. For example, the Spacey
Artist may or may not also be a Perfectionist or may be a Crusher too. While I
won’t go over all of them, I will describe Shapers—the one that best represents
me—in some depth.
h. Shapers are people who can go from visualization to actualization. I wrote a lot about
the people I call “shapers” in the first part of this book. I use the word to mean
someone who comes up with unique and valuable visions and builds them out
beautifully, typically over the doubts of others. Shapers get both the big picture
and the details right. To me, it seems that Shaper = Visionary + Practical Thinker
+ Determined.
I’ve found that shapers tend to share attributes such as intense curiosity and a
compulsive need to make sense of things, independent thinking that verges on
rebelliousness, a need to dream big and unconventionally, a practicality and
determination to push through all obstacles to achieve their goals, and a
knowledge of their own and others’ weaknesses and strengths so they can
orchestrate teams to achieve them. Perhaps even more importantly, they can hold
conflicting thoughts simultaneously and look at them from different angles.
They typically love to knock things around with other really smart people and
can easily navigate back and forth between the big picture and the granular
details, counting both as equally important.
People wired with enough of these ways of thinking that they can operate in
the world as shapers are very rare. But they could never succeed without
working with others who are more naturally suited for other things and whose
ways of thinking and acting are also essential.
Knowing how one is wired is a necessary first step on any life journey. It doesn’t
matter what you do with your life, as long as you are doing what is consistent
with your nature and your aspirations. Having spent time with some of the
richest, most powerful, most admired people in the world, as well as some of the
poorest, most disadvantaged people in the most obscure corners of the globe, I
can assure you that, beyond a basic level, there is no correlation between
happiness levels and conventional markers of success. A carpenter who derives
his deepest satisfaction from working with wood can easily have a life as good
or better than the president of the United States. If you’ve learned anything from
this book I hope it’s that everyone has strengths and weaknesses, and everyone
has an important role to play in life. Nature made everything and everyone for a
purpose. The courage that’s needed the most isn’t the kind that drives you to
prevail over others, but the kind that allows you to be true to your truest self, no
matter what other people want you to be.
4.5 Getting the right people in the right roles in support
of your goal is the key to succeeding at whatever
you choose to accomplish.
Whether it’s in your private life or your work life, it is best for you to work with
others in such a way that each person is matched up with other complementary
people to create the best mix of attributes for their tasks.
a. Manage yourself and orchestrate others to get what you want. Your greatest
challenge will be having your thoughtful higher-level you manage your
emotional lower-level you. The best way to do that is to consciously develop
habits that will make doing the things that are good for you habitual. In
managing others, the analogy that comes to mind is a great orchestra. The person
in charge is the shaper-conductor who doesn’t “do” (e.g., doesn’t play an
instrument, though he or she knows a lot about instruments) as much as visualize
the outcome and sees to it that each member of the orchestra helps achieve it.
The conductor makes sure each member of the orchestra knows what he or she is
good at and what they’re not good at, and what their responsibilities are. Each
must not only perform at their personal best but work together so the orchestra
becomes more than the sum of its parts. One of the conductor’s hardest and most
thankless jobs is getting rid of people who consistently don’t play well
individually or with others. Most importantly, the conductor ensures that the
score is executed exactly as he or she hears it in his or her head. “The music
needs to sound this way,” she says, and then she makes sure it does. “Bass
players, bring out the structure. Here are the connections, here’s the spirit.” Each
section of the orchestra has its own leaders—the concertmaster, the first chairs—
who also help bring out the composer’s and the conductor’s visions.
Approaching things in this way has helped me a lot. For example, with the
bond systemization project I mentioned earlier, having this new perspective
allowed us to better see the gaps between what we had and what we needed.
While Bob was a great intellectual partner to me in understanding the big-picture
problem we wanted to solve, he was much weaker at visualizing the process
required to get us from where we were to the solution. He also wasn’t
surrounding himself with the right people. He tended to want to work with
people who were like him, so his main deputy on the project was a great sparring
partner for mapping out big ideas on a whiteboard but a lousy one for fleshing
out the who, what, and when needed to bring those ideas to life. This deputy
tested as a “Flexor,” meaning that he was great at going in whatever direction
Bob wanted to but lacked the clear, independent view needed to keep Bob on
track.
After a few rounds of not making progress, we used our new tools for
understanding people and acted on them, pushing Bob to transition to a new
deputy who was especially skilled at navigating the levels between the bigpicture ideas and the discrete, smaller projects required to bring them about.
Comparing the new deputy’s Baseball Card to the original deputy’s, she excelled
in independent and systematic thinking, which were essential for having a clear
picture of what to do with Bob’s big ideas. This new deputy brought on other
layers of support, including a project manager who was less engaged with the
concepts and much more focused on the details of specific tasks and deadlines.
When we looked at the new team members’ Baseball Cards, we could quickly
see them lighting up in some of the areas around being planful, concrete, and
driving things to completion, which were areas of weakness for Bob. With this
new team in place, things really started to hum. It was only by looking hard at
the complete “Lego set” required to achieve our goal—and then going out and
finding the missing pieces—that we were able to do it.
Bond systemization is just one of countless projects that have benefited from
our frank and open approach to understanding what people are like. And to be
clear, I have just scratched the surface of what there is to know about mental
wiring.
In the next chapter, I’ll bring everything you’ve read about up to now
together and break down the essentials of decision making. Some decisions you
should make yourself and some you should delegate to someone more
believable. Using self-knowledge to know which are which is the key to success
—no matter what it is you are trying to do.
29 Lots of data show that relationships are the greatest reward—that they’re more important to your health
and happiness than anything else. For example, as Robert Waldinger, director of Harvard’s seventy-fiveyear Grant and Glueck study of adult males from a variety of socioeconomic backgrounds, puts it, “You
could have all the money you’ve ever wanted, a successful career, and be in good physical health, but
without loving relationships, you won’t be happy . . . The good life is built with good relationships.”
30 A good book on this is A Whole New Mind by Daniel H. Pink, and a good article on the science of this is
“A Wandering Mind Heads Straight Toward Insight” by Robert Lee Hotz from The Wall Street Journal.
While many parts of the brain come in two halves, it’s only the more recently developed cortex, which
accounts for three-quarters of the brain, that has been shown to have functional differences between the
right and left sides.
31 That’s a big question. Entire specialties are dedicated to this question alone, and no one answer is
authoritative, certainly not mine. However, because knowing what can change is important for people trying
to manage themselves and others, I have looked fairly deeply into the issue of brain plasticity. What I
learned coincided with my own experiences, and I will pass that along to you.
32 A brain-imaging study by Harvard-affiliated researchers at Massachusetts General Hospital found
physical changes in the brain after an eight-week meditation course. Researchers identified increased
activity in parts of the brain associated with learning, memory, self-awareness, compassion, and
introspection, as well as decreased activity in the amygdala.
33 This test is helpful for seeing how people navigate levels and which levels they naturally go to.
34 If you’d like to experience some of these assessments for yourself and see your own results, visit
assessments.principles.com.
35 On the MBTI scale, this continuum is described as “Judging” vs. “Perceiving” though I prefer to use
“Planning” as judging has other connotations. In MBTI language, judging does not mean judgmental and
perceiving does not mean perceptive.
5 Learn How to Make Decisions
Effectively
As a professional decision maker, I have spent my life studying how to make
decisions effectively and have constantly looked for rules and systems that will
improve my odds of being right and ending up with more of whatever it is that I
am after.
One of the most important things I’ve come to understand is that most of the
processes that go into everyday decision making are subconscious and more
complex than is widely understood. For example, think about how you choose
and maintain a safe distance behind the car in front of you when you are driving.
Now describe the process in enough detail that someone who has never driven a
car before can do it as well as you can, or so that it can be programmed into the
computer that controls an autonomous car. I bet you can’t.
Now think about the challenge of making all of your decisions well, in a
systematic, repeatable way, and then being able to describe the processes so
clearly and precisely that anyone else can make the same quality decisions under
the same circumstances. That is what I aspire to do and have found to be
invaluable, even when highly imperfect.
While there is no one best way to make decisions, there are some universal
rules for good decision making. They start with:
5.1 Recognize that 1) the biggest threat to good decision
making is harmful emotions, and 2) decision
making is a two-step process (first learning and
then deciding).
Learning must come before deciding. As explained in Chapter One, your brain
stores different types of learning in your subconscious, your rote memory bank,
and your habits. But no matter how you acquire your knowledge or where you
store it, what’s most important is that what you know paints a true and rich
picture of the realities that will affect your decision. That’s why it always pays to
be radically open-minded and seek out believable others as you do your learning.
Many people have emotional trouble doing this and block the learning that could
help them make better decisions. Remind yourself that it’s never harmful to at
least hear an opposing point of view.
Deciding is the process of choosing which knowledge should be drawn upon
—both the facts of this particular “what is” and your broader understanding of
the cause-effect machinery that underlies it—and then weighing them to
determine a course of action, the “what to do about it.” This involves playing
different scenarios through time to visualize how to get an outcome consistent
with what you want. To do this well, you need to weigh first-order consequences
against second- and third-order consequences, and base your decisions not just
on near-term results but on results over time.
Failing to consider second- and third-order consequences is the cause of a lot
of painfully bad decisions, and it is especially deadly when the first inferior
option confirms your own biases. Never seize on the first available option, no
matter how good it seems, before you’ve asked questions and explored. To
prevent myself from falling into this trap, I used to literally ask myself questions:
Am I learning? Have I learned enough yet that it’s time for deciding? After a
while, you will just naturally and open-mindedly gather all the relevant info, but
in doing so you will have avoided the first pitfall of bad decision making, which
is to subconsciously make the decision first and then cherry-pick the data that
supports it.
But how does one learn well?
LEARNING WELL
For me, getting an accurate picture of reality ultimately comes down to two
things: being able to synthesize accurately and knowing how to navigate levels.
Synthesis is the process of converting a lot of data into an accurate picture.
The quality of your synthesis will determine the quality of your decision making.
This is why it always pays to triangulate your views with people who you know
synthesize well. This raises your chances of having a good synthesis, even if you
feel like you’ve already done it yourself. No sensible person should reject a
believable person’s views without great fear of being wrong.
To synthesize well, you must 1) synthesize the situation at hand, 2) synthesize
the situation through time, and 3) navigate levels effectively.
5.2 Synthesize the situation at hand.
Every day you are faced with an infinite number of things that come at you.
Let’s call them “dots.” To be effective, you need to be able to tell which dots are
important and which dots are not. Some people go through life collecting all
kinds of observations and opinions like pocket lint, instead of just keeping what
they need. They have “detail anxiety,” worrying about unimportant things.
Sometimes small things can be important—for example, that little rattle in
your car’s engine could just be a loose piece of plastic or it could be a sign your
timing belt is about to snap. The key is having the higher-level perspective to
make fast and accurate judgments on what the real risks are without getting
bogged down in details.
Remember:
a. One of the most important decisions you can make is who you ask questions of. Make
sure they’re fully informed and believable. Find out who is responsible for
whatever you are seeking to understand and then ask them. Listening to
uninformed people is worse than having no answers at all.
b. Don’t believe everything you hear. Opinions are a dime a dozen and nearly
everyone will share theirs with you. Many will state them as if they are facts.
Don’t mistake opinions for facts.
c. Everything looks bigger up close. In all aspects of life, what’s happening today
seems like a much bigger deal than it will appear in retrospect. That’s why it
helps to step back to gain perspective and sometimes defer a decision until some
time passes.
d. New is overvalued relative to great. For example, when choosing which movie to
watch or what book to read, are you drawn to proven classics or the newest big
thing? In my opinion, it is smarter to choose the great over the new.
e. Don’t oversqueeze dots. A dot is just one piece of data from one moment in time;
keep that in perspective as you synthesize. Just as you need to sort big from
small, and what’s happening in the moment from overall patterns, you need to
know how much learning you can get out of any one dot without overweighing
it.
5.3 Synthesize the situation through time.
To see how the dots connect through time you must collect, analyze, and sort
different types of information, which isn’t easy. For example, let’s imagine a day
in which eight outcomes occur. Some are good, some bad. Let’s illustrate this
day as shown, with each type of event represented by a letter and the quality of
the outcome represented by its height.
In order to see the day this way, you must categorize outcomes by type
(signified by letters) and quality (the higher up the graph, the better), which will
require synthesizing a by-and-large assessment of each. (To make the example
more concrete, imagine you’re running an ice cream shop and the W’s represent
sales, the X’s represent customer experience ratings, the Y’s represent press and
reviews, the Z’s represent staff engagement, etc.) Keep in mind that our example
is a relatively simple one: just eight occurrences over one day.
From the chart on the right, you can see that it was a great day for sales
(because the W’s are at the top) and a bad day for customer experience (the X’s).
You might conjecture why—maybe a crowd generated sales but produced long
lines.

Now let’s look at what a month of workdays looks like. Confusing, eh?
The chart below plots just the type X dots, which you can see are improving.
People who are good at pulling out such patterns of events are rare and
essential, but as with most abilities, synthesizing through time is only partially
innate; even if you’re not good at it, you can get better through practice. You’ll
increase your chances of succeeding at it if you follow the next principle.
a. Keep in mind both the rates of change and the levels of things, and the relationships
between them. When determining an acceptable rate of improvement for
something, it is its level in relation to the rate of change that matters. I often see
people lose sight of this. They say “it’s getting better” without noticing how far
below the bar it is and whether the rate of change will get it above the bar in an
acceptable amount of time. If someone who has been getting grades of 30s and
40s on their tests raised their scores to 50s over the course of a few months it
would be accurate to say that they are getting better, but they would still be
woefully inadequate. Everything important in your life needs to be on a
trajectory to be above the bar and headed toward excellent at an appropriate
pace. The lines in the chart on the next page show how the dots connect through
time. A’s trajectory gets you above the bar in an appropriate amount of time; B’s
does not. To make good decisions, you need to understand the reality of which
of these two cases is happening.
b. Be imprecise. Understand the concept of “by-and-large” and use
approximations. Because our educational system is hung up on precision, the art
of being good at approximations is insufficiently valued. This impedes
conceptual thinking. For example, when asked to multiply 38 by 12, most people
do it the slow and hard way rather than simply rounding 38 up to 40, rounding
12 down to 10, and quickly determining that the answer is about 400. Look at
the ice cream shop example and imagine the value of quickly seeing the
approximate relationships between the dots versus taking the time to see all the
edges precisely. It would be silly to spend time doing that, yet that’s exactly
what most people do. “By-and-large” is the level at which you need to
understand most things in order to make effective decisions. Whenever a bigpicture “by-and-large” statement is made and someone replies “Not always,” my
instinctual reaction is that we are probably about to dive into the weeds—i.e.,
into a discussion of the exceptions rather than the rule, and in the process we will
lose sight of the rule. To help people at Bridgewater avoid this time waster, one
of our just-out-of-college associates coined a saying I often repeat: “When you
ask someone whether something is true and they tell you that it’s not totally true,
it’s probably by-and-large true.”
c. Remember the 80/20 Rule and know what the key 20 percent is. The 80/20 Rule
states that you get 80 percent of the value out of something from 20 percent of
the information or effort. (It’s also true that you’re likely to exert 80 percent of
your effort getting the final 20 percent of value.) Understanding this rule saves
you from getting bogged down in unnecessary detail once you’ve gotten most of
the learning you need to make a good decision.
d. Be an imperfectionist. Perfectionists spend too much time on little differences at
the margins at the expense of the important things. There are typically just five
to ten important factors to consider when making a decision. It is important to
understand these really well, though the marginal gains of studying even the
important things past a certain point are limited.
5.4 Navigate levels effectively.
Reality exists at different levels and each of them gives you different but
valuable perspectives. It’s important to keep all of them in mind as you
synthesize and make decisions, and to know how to navigate between them.
Let’s say you’re looking at your hometown on Google Maps. Zoom in close
enough to see the buildings and you won’t be able to see the region surrounding
your town, which can tell you important things. Maybe your town sits next to a
body of water. Zoom in too close and you won’t be able to tell if the shoreline is
along a river, a lake, or an ocean. You need to know which level is appropriate
to your decision.
We are constantly seeing things at different levels and navigating between
them, whether we know it or not, whether we do it well or not, and whether our
objects are physical things, ideas, or goals. For example, you can navigate levels
to move from your values to what you do to realize them on a day-to-day basis.
This is what that looks like in outline:
1 The High-Level Big Picture: I want meaningful work that’s full of learning.
1.1 Subordinate Concept: I want to be a doctor.
• Sub-Point: I need to go to medical school.
• Sub-Sub Point: I need to get good grades in the sciences.
• Sub-Sub-Sub Point: I need to stay home tonight and study.
To observe how well you do this in your own life, pay attention to your
conversations. We tend to move between levels when we talk.
a. Use the terms “above the line” and “below the line” to establish which level a
conversation is on. An above-the-line conversation addresses the main points and a
below-the-line conversation focuses on the sub-points. When a line of reasoning
is jumbled and confusing, it’s often because the speaker has gotten caught up in
below-the-line details without connecting them back to the major points. An
above-the-line discourse should progress in an orderly and accurate way to its
conclusion, only going below the line when it’s necessary to illustrate something
about one of the major points.
b. Remember that decisions need to be made at the appropriate level, but they should also
be consistent across levels. For instance, if you want to have a healthy life, you
shouldn’t have twelve sausage links and a beer every day for breakfast. In other
words, you need to constantly connect and reconcile the data you’re gathering at
different levels in order to draw a complete picture of what’s going on. Like
synthesizing in general, some people are naturally better at this than others, but
anyone can learn to do this to one degree or another. To do it well, it’s necessary
to:



1. Remember that multiple levels exist for all subjects.
2. Be aware on what level you’re examining a given subject.
3. Consciously navigate levels rather than see subjects as undifferentiated
piles of facts that can be browsed randomly.
4. Diagram the flow of your thought processes using the outline template
shown on the previous page.
When you do all this with radical open-mindedness, you will become more
aware not just of what you’re seeing, but what you’re not seeing and what
others, perhaps, are. It’s a little like when jazz musicians jam; knowing what
level you’re on allows everyone to play in the same key. When you know your
own way of seeing and are open to others’ ways too, you can create good
conceptual jazz together rather than just screech at each other. Now let’s go up a
level and examine deciding.
DECIDE WELL
Using decision-making logic to produce the best long-term outcomes has
become its own science—one that employs probabilities and statistics, game
theory, and other tools. While many of these tools are helpful, the fundamentals
of effective decision making are relatively simple and timeless—in fact they are
genetically encoded in our brains to varying degrees. Watch animals in the wild
and you’ll see that they instinctively make expected value calculations to
optimize the energy they expend to find food. Those that did this well prospered
and passed on their genes through the process of natural selection; those that did
it poorly perished. While most humans who do this badly won’t perish, they will
certainly be penalized by the process of economic selection.
As previously explained, there are two broad approaches to decision making:
evidence/logic-based (which comes from the higher- level brain) and
subconscious/emotion-based (which comes from the lower-level animal brain).
5.5 Logic, reason, and common sense are your best
tools for synthesizing reality and understanding
what to do about it.
Be wary of relying on anything else. Unfortunately, numerous tests by
psychologists show that the majority of people follow the lower-level path most
of the time, which leads to inferior decisions without their realizing it. As Carl
Jung put it, “Until you make the unconscious conscious, it will direct your life
and you will call it fate.” It’s even more important that decision making be
evidence-based and logical when groups of people are working together. If it’s
not, the process will inevitably be dominated by the most powerful rather than
the most insightful participants, which is not only unfair but suboptimal.
Successful organizations have cultures in which evidence-based decision making
is the norm rather than the exception.
5.6 Make your decisions as expected value calculations.
Think of every decision as a bet with a probability and a reward for being right
and a probability and a penalty for being wrong. Normally a winning decision is
one with a positive expected value, meaning that the reward times its probability
of occurring is greater than the penalty times its probability of occurring, with
the best decision being the one with the highest expected value.
Let’s say the reward for being right is $100 and its probability is 60 percent,
while the penalty for being wrong is also $100. If you multiply the reward by the
probability of being right you get $60 and if you multiply the penalty by the
probability of being wrong (40 percent) you get $40. If you subtract the penalty
from the reward, the difference is the expected value, which in this case is
positive (+$20). Once you understand expected value, you also understand that
it’s not always best to bet on what’s most probable. For example, suppose
something that has only a one-in-five chance (20 percent) of succeeding will
return ten times (e.g., $1,000) the amount that it will cost you if it fails ($100).
Its expected value is positive ($120), so it’s probably a smart decision, even
though the odds are against you, as long as you can also cover the loss. Play
these probabilities over and over again and they will surely give you winning
results over time.
Though we mostly don’t carry out these calculations explicitly, we constantly
make them intuitively. For example, when you decide to take an umbrella to the
store even though there’s just a 40 percent chance of rain, or you check your
phone to confirm the directions somewhere, even though you’re almost certain
you know the way, you’re making expected value calculations.
Sometimes it’s smart to take a chance even when the odds are
overwhelmingly against you if the cost of being wrong is negligible relative to
the reward that comes with the slim chance of being right. As the saying goes,
“It never hurts to ask.”
This principle made a big difference in my own life. Years ago, when I was
just starting my family, I saw a house that was perfect for us in every way. The
problem was that it wasn’t on the market and everyone I asked told me the
owner wasn’t interested in selling. To make matters worse, I was pretty sure I
would be turned down for an adequate mortgage. But I figured that it wouldn’t
cost me anything to call the owner to see if we could work something out. As it
turned out, not only was he willing to sell, he was willing to give me a loan!
The same principle applies when the downside is terrible. For example, even
if the probability of your having cancer is low, it might pay to get yourself tested
when you have a symptom just to make sure.
To help you make expected value calculations well, remember that:
a. Raising the probability of being right is valuable no matter what your probability of
being right already is. I often observe people making decisions if their odds of
being right are greater than 50 percent. What they fail to see is how much better
off they’d be if they raised their chances even more (you can almost always
improve your odds of being right by doing things that will give you more
information). The expected value gain from raising the probability of being right
from 51 percent to 85 percent (i.e., by 34 percentage points) is seventeen times
more than raising the odds of being right from 49 percent (which is probably
wrong) to 51 percent (which is only a little more likely to be right). Think of the
probability as a measure of how often you’re likely to be wrong. Raising the
probability of being right by 34 percentage points means that a third of your bets
will switch from losses to wins. That’s why it pays to stress-test your thinking,
even when you’re pretty sure you’re right.
b. Knowing when not to bet is as important as knowing what bets are probably worth
making. You can significantly improve your track record if you only make the
bets that you are most confident will pay off.
c. The best choices are the ones that have more pros than cons, not those that don’t have
any cons at all. Watch out for people who argue against something whenever they
can find something—anything—wrong with it, without properly weighing all the
pluses and minuses. Such people tend to be poor decision makers.
5.7 Prioritize by weighing the value of additional
information against the cost of not deciding.
Some decisions are best made after acquiring more information; some are best
made immediately. Just as you need to constantly sort the big from the small
when you are synthesizing what’s going on, you need to constantly evaluate the
marginal benefit of gathering more information against the marginal cost of
waiting to decide. People who prioritize well understand the following:
a. All of your “must-dos” must be above the bar before you do your “like-to-dos.”
Separate your “must-dos” from your “like-to-dos” and don’t mistakenly slip any
“like-to-dos” onto the first list.
b. Chances are you won’t have time to deal with the unimportant things, which is better
than not having time to deal with the impor-tant things. I often hear people say,
“Wouldn’t it be good to do this or that?” It’s likely they are being distracted
from far more important things that need to be done well.
c. Don’t mistake possibilities for probabilities. Anything is possible. It’s the
probabilities that matter. Everything must be weighed in terms of its likelihood
and prioritized. People who can accurately sort probabilities from possibilities
are generally strong at “practical thinking”; they’re the opposite of the
“philosopher” types who tend to get lost in clouds of possibilities.
SHORTCUTS FOR BECOMING A GREAT DECISION
MAKER
Great decision makers don’t remember all of these steps in a rote way and carry
them out mechanically, yet they do follow them. That’s because through time
and experience they’ve learned to do most of them reflexively, just as a baseball
player catches a fly ball without thinking about how he’s going to do it. If they
had to call each of the principles up from their memory and then run them
through their slow conscious minds, they couldn’t possibly handle all the things
that are coming at them well. But there are a couple of things that they do carry
out consciously and you should do them too.
5.8 Simplify!
Get rid of irrelevant details so that the essential things and the relationships
between them stand out. As the saying goes, “Any damn fool can make it
complex. It takes a genius to make it simple.” Think of Picasso. He could paint
beautiful representational paintings from an early age, but he continually pared
down and simplified as his career progressed. Not everyone has a mind that
works that way, but just because you can’t do something naturally doesn’t mean
you can’t do it—you just have to have creativity and determination. If necessary,
you can seek the help of others.
5.9 Use principles.
Using principles is a way of both simplifying and improving your decision
making. While it might seem obvious to you by now, it’s worth repeating that
realizing that almost all “cases at hand” are just “another one of those,”
identifying which “one of those” it is, and then applying well-thought-out
principles for dealing with it. This will allow you to massively reduce the
number of decisions you have to make (I estimate by a factor of something like
100,000) and will lead you to make much better ones. The key to doing this well
is to:
1. Slow down your thinking so you can note the criteria you are using to make
your decision.
2. Write the criteria down as a principle.
3. Think about those criteria when you have an outcome to assess, and refine
them before the next “one of those” comes along.
Identifying which “one of those” each thing is is like identifying which
species an animal is. Doing that for each thing and then matching it up with the
appropriate principles will become like playing a game, so it will be fun as well
as helpful. Of course it can also be challenging. Many “cases at hand,” as I call
them, are hybrids. When a case at hand contains a few “another ones of those,”
one must weigh different principles against each other, using mental maps of
how the different types of things I encounter should be handled. To help people
do that, I created a tool called a Coach, which is explained in the Appendix.
You can use your own principles, or you can use others’; you just want to use
the best ones possible well. If you think that way constantly, you will become an
excellent principled thinker.
5.10 Believability weight your decision making
I have found triangulating with highly believable people who are willing to have
thoughtful disagreements has never failed to enhance my learning and sharpen
the quality of my decision making. It typically leads me to make better decisions
than I could have otherwise and it typically provides me with thrilling learning. I
urge you to do it.
To do it well, be sure to avoid the common perils of: 1) valuing your own
believability more than is logical and 2) not distinguishing between who is more
or less credible.
In case of a disagreement with others, start by seeing if you can agree on the
principles that should be used to make that decision. This discussion should
include exploring the merits of the reasoning behind the different principles. If
you agree on them, apply them to the case at hand and you’ll arrive at a
conclusion everyone agrees on. If you disagree on the principles, try to work
through your disagreement based on your respective believabilities. I will
explain how we do this in more detail in Work Principles.
This sort of principled and believability-weighted decision making is
fascinating and leads to much different and much better decision making than is
typical. For example, imagine if we used this approach to choose the president. It
would be fascinating to see which principles we would come up with both for
determining what makes a good president as well as for deciding who is most
believable in making such determinations. Would we wind up with something
like one person one vote, or something different? And if different, in what ways?
It certainly would lead to very different outcomes. During the next election, let’s
do this in parallel with our ordinary electoral process so we can see the
difference.
While believability-weighted decision making can sound complicated,
chances are you do it all the time—pretty much whenever you ask yourself,
“Who should I listen to?” But it’s almost certainly true that you’d do it a lot
better if you gave more thought to it.
5.11 Convert your principles into algorithms and have
the computer make decisions alongside you.
If you can do that, you will take the power of your decision making to a whole
other level. In many cases, you will be able to test how that principle would have
worked in the past or in various situations that will help you refine it, and in all
cases, it will allow you to compound your understanding to a degree that would
otherwise be impossible. It will also take emotion out of the equation.
Algorithms work just like words in describing what you would like to have done,
but they are written in a language that the computer can understand. If you don’t
know how to speak this language, you should either learn it or have someone
close to you who can translate for you. Your children and their peers must learn
to speak this language because it will soon be as important or more important
than any other language.
By developing a partnership with your computer alter ego in which you teach
each other and each do what you do best, you will be much more powerful than
if you went about your decision making alone. The computer will also be your
link to great collective decision making, which is far more powerful than
individual decision making, and will almost certainly advance the evolution of
our species.
SYSTEMIZED AND COMPUTERIZED DECISION
MAKING
In the future, artificial intelligence will have a profound impact on how we make
decisions in every aspect of our lives—especially when combined with the new
era of radical transparency about people that’s already upon us. Right now,
whether you like it or not, it is easy for anyone to access your digital data to
learn a tremendous amount about what you’re like, and this data can be fed into
computers that do everything from predict what you’re likely to buy to what you
value in life. While this sounds scary to many people, at Bridgewater we have
been combining radical transparency with algorithmic decision making for more
than thirty years and have found that it produces remarkable results. In fact, I
believe that it won’t be long before this kind of computerized decision making
guides us nearly as much as our brains do now.
The concept of artificial intelligence is not new. Even back in the 1970s,
when I first started experimenting with computerized decision making, it had
already been around for nearly twenty years (the term “artificial intelligence”
was first introduced in 1956 at a conference at Dartmouth College). While a lot
has changed since then, the basic concepts remain the same.
To give you just one ultrasimple example of how computerized decision
making works, let’s say you have two principles for heating your home: You
want to turn the heat on when the temperature falls below 68 and you want to
turn the heat off between midnight and 5:00 a.m. You can express the
relationship between these criteria in a simple decision-making formula: If the
temperature is less than 68 degrees and the time is not between 5:00 a.m. and
midnight, then turn on the heat. By gathering many such formulas, it’s possible
to create a decision-making system that takes in data, applies and weighs the
relevant criteria, and recommends a decision.
THINKING
PRINCIPLES
ALGORITHMS
Specifying our investment decision-making criteria in algorithms and running
historical data through them, or specifying our work principles in algorithms and
using them to aid in management decision making, are just bigger and more
complicated versions of that smart thermostat. They allow us to make more
informed and less emotional decisions much faster than we could on our own.
I believe that people will increasingly do this and that computer coding will
become as essential as writing. In time, we will use machine assistants as much
for decision making as we do for information gathering today. As these
machines help us, they will learn about what we are like—what we value, what
our strengths and weaknesses are—and they will be able to tailor the advice they
give us by automatically seeking out the help of others who are strong where we
are weak. It won’t be long before our machine assistants are speaking to others’
machine assistants and collaborating in this way. In fact, that’s beginning to
happen already.
Imagine a world in which you can use technology to connect to a system in
which you can input the issue you’re dealing with and have exchanges about
what you should do and why with the highest-rated thinkers in the world. We’ll
soon be able to do this. Before too long, you will be able to tap the highestquality thinking on nearly every issue you face and get the guidance of a
computerized system that weighs different points of view. For example, you will
be able to ask what lifestyle or career you should choose given what you’re like,
or how to best interact with specific people based on what they’re like. These
innovations will help people get out of their own heads and unlock an incredibly
powerful form of collective thinking. We are doing this now and have found it
way better than traditional thinking.
While this kind of view often leads to talk of artificial intelligence competing
with human intelligence, in my opinion human and artificial intelligence are far
more likely to work together because that will produce the best results. It’ll be
decades—and maybe never—before the computer can replicate many of the
things that the brain can do in terms of imagination, synthesis, and creativity.
That’s because the brain comes genetically programmed with millions of years
of abilities honed through evolution. The “science” of decision making that
underlies many computer systems remains much less valuable than the “art.”
People still make the most important decisions better than computers do. To see
this, you need look no further than at the kinds of people who are uniquely
successful. Software developers, mathematicians, and game-theory modelers
aren’t running away with all the rewards; it is the people who have the most
common sense, imagination, and determination.
Only human intelligence can apply the interpretations that are required to
provide computer models with appropriate input. For example, a computer can’t
tell you how to weigh the value of the time you spend with your loved ones
against the time you spend at work or the optimal mix of hours that will provide
you with the best marginal utilities for each activity. Only you know what you
value most, who you want to share your life with, what kind of environment you
want to be in, and ultimately how to make the best choices to bring those things
about. What’s more, so much of our thinking comes from the subconscious in
ways we don’t understand, that thinking we can model it fully is as unlikely as
an animal that has never experienced abstract thinking attempting to define and
replicate it.
Yet at the same time, the brain cannot compete with the computer in many
ways. Computers have much greater “determination” than any person, as they
will work 24/7 for you. They can process vastly more information, and they can
do it much faster, more reliably, and more objectively than you could ever hope
to. They can bring millions of possibilities that you never thought of to your
attention. Perhaps most important of all, they are immune to the biases and
consensus-driven thinking of crowds; they don’t care if what they see is
unpopular, and they never panic. During those terrible days after 9/11, when the
whole country was being whipsawed by emotion, or the weeks between
September 19 and October 10, 2008, when the Dow fell 3,600 points, there were
times I felt like hugging our computers. They kept their cool no matter what.
This combination of man and machine is wonderful. The process of man’s
mind working with technology is what elevates us—it’s what has taken us from
an economy where most people dig in the dirt to today’s Information Age. It’s
for that reason that people who have common sense, imagination, and
determination, who know what they value and what they want, and who also use
computers, math, and game theory, are the best decision makers there are. At
Bridgewater, we use our systems much as a driver uses a GPS in a car: not to
substitute for our navigational abilities but to supplement them.
5.12 Be cautious about trusting AI without having deep
understanding.
I worry about the dangers of AI in cases where users accept—or, worse, act upon
—the cause-effect relationships presumed in algorithms produced by machine
learning without understanding them deeply.
Before I explain why, I want to clarify my terms. “Artificial intelligence” and
“machine learning” are words that are thrown around casually and often used as
synonyms, even though they are quite different. I categorize what is going on in
the world of computer-aided decision making under three broad types: expert
systems, mimicking, and data mining (these categories are mine and not the ones
in common use in the technology world).
Expert systems are what we use at Bridgewater, where designers specify
criteria based on their logical understandings of a set of cause-effect
relationships, and then see how different scenarios would emerge under different
circumstances.
But computers can also observe patterns and apply them in their decision
making without having any understanding of the logic behind them. I call such
an approach “mimicking.” This can be effective when the same things happen
reliably over and over again and are not subject to change, such as in a game
bounded by hard-and-fast rules. But in the real world things do change, so a
system can easily fall out of sync with reality.
The main thrust of machine learning in recent years has gone in the direction
of data mining, in which powerful computers ingest massive amounts of data
and look for patterns. While this approach is popular, it’s risky in cases when the
future might be different from the past. Investment systems built on machine
learning that is not accompanied by deep understanding are dangerous because
when some decision rule is widely believed, it becomes widely used, which
affects the price. In other words, the value of a widely known insight disappears
over time. Without deep understanding, you won’t know if what happened in the
past is genuinely of value and, even if it was, you will not be able to know
whether or not its value has disappeared—or worse. It’s common for some
decision rules to become so popular that they push the price far enough that it
becomes smarter to do the opposite.
Remember that computers have no common sense. For example, a computer
could easily misconstrue the fact that people wake up in the morning and then
eat breakfast to indicate that waking up makes people hungry. I’d rather have
fewer bets (ideally uncorrelated ones) in which I am highly confident than more
bets I’m less confident in, and would consider it intolerable if I couldn’t argue
the logic behind any of my decisions. A lot of people vest their blind faith in
machine learning because they find it much easier than developing deep
understanding. For me, that deep understanding is essential, especially for what I
do.
I don’t mean to imply that these mimicking or data-mining systems, as I call
them, are useless. In fact, I believe that they can be extremely useful in making
decisions in which the future range and configuration of events are the same as
they’ve been in the past. Given enough computing power, all possible variables
can be taken into consideration. For example, by analyzing data about the moves
that great chess players have made under certain circumstances, or the
procedures great surgeons have used during certain types of operations, valuable
programs can be created for chess playing or surgery. Back in 1997, the
computer program Deep Blue beat Garry Kasparov, the world’s highest-ranked
chess player, using just this approach. But this approach fails in cases where the
future is different from the past and you don’t know the cause-effect
relationships well enough to recognize them all. Understanding these
relationships as I do has saved me from making mistakes when others did, most
obviously in the 2008 financial crisis. Nearly everyone else assumed that the
future would be similar to the past. Focusing strictly on the logical cause-effect
relationships was what allowed us to see what was really going on.
When you get down to it, our brains are essentially computers that are
programmed in certain ways, take in data, and spit out instructions. We can
program the logic in both the computer that is our mind and the computer that is
our tool so that they can work together and even double-check each other. Doing
that is fabulous.
For example, suppose we were trying to derive the universal laws that explain
species change over time. Theoretically, with enough processing power and
time, this should be possible. We would need to make sense of the formulas the
computer produces, of course, to make sure that they are not data-mined
gibberish, by which I mean based on correlations that are not causal in any way.
We would do this by constantly simplifying these rules until their elegance is
unmistakable.
Of course, given our brain’s limited capacity and processing speed, it could
take us forever to achieve a rich understanding of all the variables that go into
evolution. Is all the simplifying and understanding that we employ in our expert
systems truly required? Maybe not. There is certainly a risk that changes not in
the tested data might still occur. But one might argue that if our data-miningbased formulas seem able to account for the evolution of all species through all
time, then the risks of relying on them for just the next ten, twenty, or fifty years
is relatively low compared to the benefits of having a formula that appears to
work but is not fully understandable (and that, at the very least, might prove
useful in helping scientists cure genetic diseases).
In fact, we may be too hung up on understanding; conscious thinking is only
one part of understanding. Maybe it’s enough that we derive a formula for
change and use it to anticipate what is yet to come. I myself find the excitement,
lower risk, and educational value of achieving a deep understanding of causeeffect relationships much more appealing than a reliance on algorithms I don’t
understand, so I am drawn to that path. But is it my lower-level preferences and
habits that are pulling me in this direction or is it my logic and reason? I’m not
sure. I look forward to probing the best minds in artificial intelligence on this
(and having them probe me).
Most likely, our competitive natures will compel us to place bigger and
bigger bets on relationships computers find that are beyond our understanding.
Some of those bets will pay off, while others will backfire. I suspect that AI will
lead to incredibly fast and remarkable advances, but I also fear that it could lead
to our demise.
We are headed for an exciting and perilous new world. That’s our reality.
And as always, I believe that we are much better off preparing to deal with it
than wishing it weren’t true.
In order to have the best life
possible, you have to:
1) know what the best
decisions are and
2) have the courage to make
them.
LIFE PRINCIPLES: PUTTING IT ALL TOGETHER
In Life Principles, I’ve explained some principles that helped me do both of
these things. I believe that because the same kinds of things happen over and
over again, a relatively few well-thought-out principles will allow you to deal
with just about anything that reality throws at you. Where you get these
principles from doesn’t matter as much as having them and using them
consistently—and that you never stop refining and improving them.
To acquire principles that work, it’s essential that you embrace reality and
deal with it well. Don’t fall into the common trap of wishing that reality worked
differently than it does or that your own realities were different. Instead,
embrace your realities and deal with them effectively. After all, making the most
of your circumstances is what life is all about. This includes being transparent
with your thoughts and open-mindedly accepting the feedback of others. Doing
so will dramatically increase your learning.
Along your journey you will inevitably experience painful failures. It is
important to realize that they can either be the impetus that fuels your personal
evolution or they can ruin you, depending on how you react to them. I believe
that evolution is the greatest force in the universe and that we all evolve in
basically the same way. Conceptually, it looks like a series of loops that either
lead upward toward constant improvement or remain flat or even trend
downward toward ruin. You will determine what your own loops look like.
Your evolutionary process can be described as a 5-Step Process for getting
what you want. It consists of setting goals, identifying and not tolerating
problems, diagnosing problems, coming up with designs to get around them, and
then doing the tasks required. The important thing to remember is that no one
can do all the steps well, but that it’s possible to rely on others to help. Different
people with different abilities working well together create the most powerful
machines to produce achievements.
If you’re willing to confront reality, accept the pain that comes with doing so,
and follow the 5-Step Process to drive yourself toward your goals, you’re on the
path to success. Yet most people fail to do this because they hold on to bad
opinions that could easily be rectified by going above themselves to objectively
look down at their situation and weigh what they and others think about it. It’s
for that reason I believe you must be radically open-minded.
Our biggest barriers for doing this well are our ego barrier and our blind spot
barrier. The ego barrier is our innate desire to be capable and have others
recognize us as such. The blind spot barrier is the result of our seeing things
through our own subjective lenses; both barriers can prevent us from seeing how
things really are. The most important antidote for them is radical openmindedness, which is motivated by the genuine worry that one might not be
seeing one’s choices optimally. It is the ability to effectively explore different
points of view and different possibilities without letting your ego or your blind
spots get in your way.
Doing this well requires practicing thoughtful disagreement, which is the
process of seeking out brilliant people who disagree with you in order to see
things through their eyes and gain a deeper understanding. Doing this will raise
your probability of making good decisions and will also give you a fabulous
education. If you can learn radical open-mindedness and practice thoughtful
disagreement, you’ll radically increase your learning.
Finally, being radically open-minded requires you to have an accurate selfassessment of your own and others’ strengths and weaknesses. This is where
understanding something about how the brain works and the different
psychometric assessments that can help you discover what your own brain is like
comes in. To get the best results out of yourself and others, you must
understand that people are wired very differently.
In a nutshell, learning how to make decisions in the best possible way and
learning to have the courage to make them comes from a) going after what you
want, b) failing and reflecting well through radical open-mindedness, and c)
changing/evolving to become ever more capable and less fearful. In the final
chapter of this section, Learn How to Make Decisions Effectively, I shared some
more granular principles for how to do all of the above and weigh your options
in specific situations to determine the right path to follow.
You can of course do all of these things alone, but if you’ve understood
anything about the concept of radical open-mindedness, it should be obvious that
going it alone will only take you so far. We all need others to help us triangulate
and get to the best possible decisions—and to help us see our weaknesses
objectively and compensate for them. More than anything else, your life is
affected by the people around you and how you interact with each other.
Your ability to get what you want when working with others who want the
same things is much greater than your ability to get these things by yourself. Yet
we haven’t talked about how groups should operate to be most effective. That’s
what we’ll do in Work Principles.
Work Principles is about people working together. Because the power of a
group is so much greater than the power of an individual, the principles that
follow are likely even more important than those we covered up to this point. In
fact, I wrote them first and then wrote Life Principles in order to help others
make sense of the approach I was implicitly applying in running Bridgewater.
My Work Principles are basically the Life Principles you just read, applied to
groups. I will show you, principle by principle, how an actual, practical,
believability-weighted decision-making system converts independent thinking
into effective group decision making. I believe that such a system can work to
make any kind of organization—business, government, philanthropic—both
more effective and more satisfying to belong to.
I hope these principles will
help you struggle well and get
all the joy you can out of life.
SUMMARY AND TABLE OF LIFE PRINCIPLES
• Think for yourself to decide 1) what you want, 2) what is true, and 3) what
you should do to achieve #1 in light of #2, and do that with humility and
open-mindedness so that you consider the best thinking available to you.
LIFE PRINCIPLES INTRODUCTION
• Look to the patterns of those things that affect you in order to understand the
cause-effect relationships that drive them and to learn principles for dealing
with them effectively.
PART II: LIFE PRINCIPLES
1 Embrace Reality and Deal with It
1.1 Be a hyperrealist.
a. Dreams + Reality + Determination = A Successful Life.
1.2 Truth—or, more precisely, an accurate understanding of reality—is the essential foundation
for any good outcome.
1.3 Be radically open-minded and radically transparent.
a. Radical open-mindedness and radical transparency are invaluable for rapid
learning and effective change.
b. Don’t let fears of what others think of you stand in your way.
c. Embracing radical truth and radical transparency will bring more meaningful work
and more meaningful relationships.
1.4 Look to nature to learn how reality works.
a. Don’t get hung up on your views of how things “should” be because you will miss
out on learning how they really are.
b. To be “good,” something must operate consistently with the laws of reality and
contribute to the evolution of the whole; that is what is most rewarded.
c. Evolution is the single greatest force in the universe; it is the only thing that is
permanent and it drives everything.
d. Evolve or die.
1.5 Evolving is life’s greatest accomplishment and its greatest reward.
a. The individual’s incentives must be aligned with the group’s goals.
b. Reality is optimizing for the whole—not for you.
c. Adaptation through rapid trial and error is invaluable.
d. Realize that you are simultaneously everything and nothing—and decide what
you want to be.
e. What you will be will depend on the perspective you have.
1.6 Understand nature’s practical lessons.
a. Maximize your evolution.
b. Remember “no pain, no gain.”
c. It is a fundamental law of nature that in order to gain strength one has to push
one’s limits, which is painful.
1.7 Pain + Reflection = Progress.
a. Go to the pain rather than avoid it.
b. Embrace tough love.
1.8 Weigh second- and third-order consequences.
1.9 Own your outcomes.
1.10 Look at the machine from the higher level.
a. Think of yourself as a machine operating within a machine and know that you
have the ability to alter your machines to produce better outcomes.
b. By comparing your outcomes with your goals, you can determine how to modify
your machine.
c. Distinguish between you as the designer of your machine and you as a worker
with your machine.
d. The biggest mistake most people make is to not see themselves and others
objectively, which leads them to bump into their own and others’ weaknesses
again and again.
e. Successful people are those who can go above themselves to see things
objectively and manage those things to shape change.
f. Asking others who are strong in areas where you are weak to help you is a great
skill that you should develop no matter what, as it will help you develop
guardrails that will prevent you from doing what you shouldn’t be doing.
g. Because it is difficult to see oneself objectively, you need to rely on the input of
others and the whole body of evidence.
h. If you are open-minded enough and determined, you can get virtually anything
you want.
2 Use the 5-Step Process to Get What You Want Out of Life
2.1 Have clear goals.
a. Prioritize: While you can have virtually anything you want, you can’t have
everything you want.
b. Don’t confuse goals with desires.
c. Decide what you really want in life by reconciling your goals and your desires.
d. Don’t mistake the trappings of success for success itself.
e. Never rule out a goal because you think it’s unattainable.
f. Remember that great expectations create great capabilities.
g. Almost nothing can stop you from succeeding if you have a) flexibility and b)
self-accountability.
h. Knowing how to deal well with your setbacks is as important as knowing how to
move forward.
2.2 Identify and don’t tolerate problems.
a. View painful problems as potential improvements that are screaming at you.
b. Don’t avoid confronting problems because they are rooted in harsh realities that
are unpleasant to look at.
c. Be specific in identifying your problems.
d. Don’t mistake a cause of a problem with the real problem.
e. Distinguish big problems from small ones.
f. Once you identify a problem, don’t tolerate it.
2.3 Diagnose problems to get at their root causes.
a. Focus on the “what is” before deciding “what to do about it.”
b. Distinguish proximate causes from root causes.
c. Recognize that knowing what someone (including you) is like will tell you what
you can expect from them.
2.4 Design a plan.
a. Go back before you go forward.
b. Think about your problem as a set of outcomes produced by a machine.
c. Remember that there are typically many paths to achieving your goals.
d. Think of your plan as being like a movie script in that you visualize who will do
what through time.
e. Write down your plan for everyone to see and to measure your progress against.
f. Recognize that it doesn’t take a lot of time to design a good plan.
2.5 Push through to completion.
a. Great planners who don’t execute their plans go nowhere.
b. Good work habits are vastly underrated.
c. Establish clear metrics to make certain that you are following your plan.
2.6 Remember that weaknesses don’t matter if you find solutions.
a. Look at the patterns of your mistakes and identify at which step in the 5-Step
Process you typically fail.
b. Everyone has at least one big thing that stands in the way of their success; find
yours and deal with it.
2.7 Understand your own and others’ mental maps and humility.
3 Be Radically Open-Minded
3.1 Recognize your two barriers.
a. Understand your ego barrier.
b. Your two “yous” fight to control you.
c. Understand your blind spot barrier.
3.2 Practice radical open-mindedness.
a. Sincerely believe that you might not know the best possible path and recognize
that your ability to deal well with “not knowing” is more important than whatever
it is you do know.
b. Recognize that decision making is a two-step process: First take in all the relevant
information, then decide.
c. Don’t worry about looking good; worry about achieving your goal.
d. Realize that you can’t put out without taking in.
e. Recognize that to gain the perspective that comes from seeing things through
another’s eyes, you must suspend judgment for a time—only by empathizing can
you properly evaluate another point of view.
f. Remember that you’re looking for the best answer, not simply the best answer that
you can come up with yourself.
g. Be clear on whether you are arguing or seeking to understand, and think about
which is most appropriate based on your and others’ believability.
3.3 Appreciate the art of thoughtful disagreement.
3.4 Triangulate your view with believable people who are willing to disagree.
a. Plan for the worst-case scenario to make it as good as possible.
3.5 Recognize the signs of closed-mindedness and open-mindedness that you should watch out
for.
3.6 Understand how you can become radically open-minded.
a. Regularly use pain as your guide toward quality reflection.
b. Make being open-minded a habit.
c. Get to know your blind spots.
d. If a number of different believable people say you are doing something wrong and
you are the only one who doesn’t see it that way, assume that you are probably
biased.
e. Meditate.
f. Be evidence-based and encourage others to be the same.
g. Do everything in your power to help others also be open-minded.
h. Use evidence-based decision-making tools.
i. Know when it’s best to stop fighting and have faith in your decision-making
process.
4 Understand That People Are Wired Very Differently
4.1 Understand the power that comes from knowing how you and others are wired.
a. We are born with attributes that can both help us and hurt us, depending on their
application.
4.2 Meaningful work and meaningful relationships aren’t just nice things we chose for ourselves
—they are genetically programmed into us.
4.3 Understand the great brain battles and how to control them to get what “you” want.
a. Realize that the conscious mind is in a battle with the subconscious mind.
b. Know that the most constant struggle is between feeling and thinking.
c. Reconcile your feelings and your thinking.
d. Choose your habits well.
e. Train your “lower-level you” with kindness and persistence to build the right
habits.
f. Understand the differences between right-brained and left-brained thinking.
g. Understand how much the brain can and cannot change.
4.4 Find out what you and others are like.
a. Introversion vs. extroversion.
b. Intuiting vs. sensing.
c. Thinking vs. feeling.
d. Planning vs. perceiving.
e. Creators vs. refiners vs. advancers vs. executors vs. flexors.
f. Focusing on tasks vs. focusing on goals.
g. Workplace Personality Inventory.
h. Shapers are people who can go from visualization to actualization.
4.5 Getting the right people in the right roles in support of your goal is the key to succeeding at
whatever you choose to accomplish.
a. Manage yourself and orchestrate others to get what you want.
5 Learn How to Make Decisions Effectively
5.1 Recognize that 1) the biggest threat to good decision making is harmful emotions, and 2)
decision making is a two-step process (first learning and then deciding).
5.2 Synthesize the situation at hand.
a. One of the most important decisions you can make is who you ask questions of.
b. Don’t believe everything you hear.
c. Everything looks bigger up close.
d. New is overvalued relative to great.
e. Don’t oversqueeze dots.
5.3 Synthesize the situation through time.
a. Keep in mind both the rates of change and the levels of things, and the
relationships between them.
b. Be imprecise.
c. Remember the 80/20 Rule and know what the key 20 percent is.
d. Be an imperfectionist.
5.4 Navigate levels effectively.
a. Use the terms “above the line” and “below the line” to establish which level a
conversation is on.
b. Remember that decisions need to be made at the appropriate level, but they
should also be consistent across levels.
5.5 Logic, reason, and common sense are your best tools for synthesizing reality and
understanding what to do about it.
5.6 Make your decisions as expected value calculations.
a. Raising the probability of being right is valuable no matter what your probability
of being right already is.
b. Knowing when not to bet is as important as knowing what bets are probably
worth making.
c. The best choices are the ones that have more pros than cons, not those that don’t
have any cons at all.
5.7 Prioritize by weighing the value of additional information against the cost of not deciding.
a. All of your “must-dos” must be above the bar before you do your “like-to-dos.”
b. Chances are you won’t have time to deal with the unimportant things, which is
better than not having time to deal with the important things.
c. Don’t mistake possibilities for probabilities.
5.8 Simplify!
5.9 Use principles.
5.10 Believability weight your decision making.
5.11 Convert your principles into algorithms and have the computer make decisions alongside you.
5.12 Be cautious about trusting AI without having deep understanding.
PART III
WORK PRINCIPLES
SUMMARY AND TABLE OF WORK PRINCIPLES
I’m including this summary and table of Work Principles here so that you have the choice
of skimming them all, finding the ones you’re most interested in, or skipping this section
and continuing your reading on page 296.
PART III: WORK PRINCIPLES
• An organization is a machine consisting of two major parts: culture and people.
a. A great organization has both great people and a great culture.
b. Great people have both great character and great capabilities.
c. Great cultures bring problems and disagreements to the surface and solve them
well, and they love imagining and building great things that haven’t been built
before.
• Tough love is effective for achieving both great work and great relationships.
a. In order to be great, one can’t compromise the uncompromisable.
• A believability-weighted idea meritocracy is the best system for making
effective decisions.
• Make your passion and your work one and the same and do it with people you
want to be with.
TO GET THE CULTURE RIGHT . . .
1 Trust in Radical Truth and Radical Transparency
1.1 Realize that you have nothing to fear from knowing the truth.
1.2 Have integrity and demand it from others.
a. Never say anything about someone that you wouldn’t say to them directly and
don’t try people without accusing them to their faces.
b. Don’t let loyalty to people stand in the way of truth and the well-being of the
organization.
1.3 Create an environment in which everyone has the right to understand what makes sense and
no one has the right to hold a critical opinion without speaking up.
a. Speak up, own it, or get out.
b. Be extremely open.
c. Don’t be naive about dishonesty.
1.4 Be radically transparent.
a. Use transparency to help enforce justice.
b. Share the things that are hardest to share.
c. Keep exceptions to radical transparency very rare.
d. Make sure those who are given radical transparency recognize their
responsibilities to handle it well and to weigh things intelligently.
e. Provide transparency to people who handle it well and either deny it to people
who don’t handle it well or remove those people from the organization.
f. Don’t share sensitive information with the organization’s enemies.
1.5 Meaningful relationships and meaningful work are mutually reinforcing, especially when
supported by radical truth and radical transparency.
2 Cultivate Meaningful Work and Meaningful Relationships
2.1 Be loyal to the common mission and not to anyone who is not operating consistently with it.
2.2 Be crystal clear on what the deal is.
a. Make sure people give more consideration to others than they demand for
themselves.
b. Make sure that people understand the difference between fairness and generosity.
c. Know where the line is and be on the far side of fair.
d. Pay for work.
2.3 Recognize that the size of the organization can pose a threat to meaningful relationships.
2.4 Remember that most people will pretend to operate in your interest while operating in their
own.
2.5 Treasure honorable people who are capable and will treat you well even when you’re not
looking.
3 Create a Culture in Which It Is Okay to Make Mistakes and Unacceptable Not to Learn
from Them
3.1 Recognize that mistakes are a natural part of the evolutionary process.
a. Fail well.
b. Don’t feel bad about your mistakes or those of others. Love them!
3.2 Don’t worry about looking good—worry about achieving your goals.
a. Get over “blame” and “credit” and get on with “accurate” and “inaccurate.”
3.3 Observe the patterns of mistakes to see if they are products of weaknesses.
3.4 Remember to reflect when you experience pain.
a. Be self-reflective and make sure your people are self-reflective.
b. Know that nobody can see themselves objectively.
c. Teach and reinforce the merits of mistake-based learning.
3.5 Know what types of mistakes are acceptable and what types are unacceptable, and don’t
allow the people who work for you to make the unacceptable ones.
4 Get and Stay in Sync
4.1 Recognize that conflicts are essential for great relationships because they are how people
determine whether their principles are aligned and resolve their differences.
a. Spend lavishly on the time and energy you devote to getting in sync, because it’s
the best investment you can make.
4.2 Know how to get in sync and disagree well.
a. Surface areas of possible out-of-syncness.
b. Distinguish between idle complaints and complaints meant to lead to
improvement.
c. Remember that every story has another side.
4.3 Be open-minded and assertive at the same time.
a. Distinguish open-minded people from closed-minded people.
b. Don’t have anything to do with closed-minded people.
c. Watch out for people who think it’s embarrassing not to know.
d. Make sure that those in charge are open-minded about the questions and
comments of others.
e. Recognize that getting in sync is a two-way responsibility.
f. Worry more about substance than style.
g. Be reasonable and expect others to be reasonable.
h. Making suggestions and questioning are not the same as criticizing, so don’t treat
them as if they are.
4.4 If it is your meeting to run, manage the conversation.
a. Make it clear who is directing the meeting and whom it is meant to serve.
b. Be precise in what you’re talking about to avoid confusion.
c. Make clear what type of communication you are going to have in light of the
objectives and priorities.
d. Lead the discussion by being assertive and open-minded.
e. Navigate between the different levels of the conversation.
f. Watch out for “topic slip.”
g. Enforce the logic of conversations.
h. Be careful not to lose personal responsibility via group decision making.
i. Utilize the “two-minute rule” to avoid persistent interruptions.
j. Watch out for assertive “fast talkers.”
k. Achieve completion in conversations.
l. Leverage your communication.
4.5 Great collaboration feels like playing jazz.
a. 1+1=3.
b. 3 to 5 is more than 20.
4.6 When you have alignment, cherish it.
4.7 If you find you can’t reconcile major differences—especially in values—consider whether the
relationship is worth preserving.
5 Believability Weight Your Decision Making
5.1 Recognize that having an effective idea meritocracy requires that you understand the merit
of each person’s ideas.
a. If you can’t successfully do something, don’t think you can tell others how it
should be done.
b. Remember that everyone has opinions and they are often bad.
5.2 Find the most believable people possible who disagree with you and try to understand their
reasoning.
a. Think about people’s believability in order to assess the likelihood that their
opinions are good.
b. Remember that believable opinions are most likely to come from people 1) who
have successfully accomplished the thing in question at least three times, and 2)
who have great explanations of the cause-effect relationships that lead them to
their conclusions.
c. If someone hasn’t done something but has a theory that seems logical and can be
stress-tested, then by all means test it.
d. Don’t pay as much attention to people’s conclusions as to the reasoning that led
them to their conclusions.
e. Inexperienced people can have great ideas too, sometimes far better ones than
more experienced people.
f. Everyone should be up-front in expressing how confident they are in their
thoughts.
5.3 Think about whether you are playing the role of a teacher, a student, or a peer and whether
you should be teaching, asking questions, or debating.
a. It’s more important that the student understand the teacher than that the teacher
understand the student, though both are important.
b. Recognize that while everyone has the right and responsibility to try to make
sense of important things, they must do so with humility and radical openmindedness.
5.4 Understand how people came by their opinions.
a. If you ask someone a question, they will probably give you an answer, so think
through to whom you should address your questions.
b. Having everyone randomly probe everyone else is an unproductive waste of time.
c. Beware of statements that begin with “I think that . . .”
d. Assess believability by systematically capturing people’s track records over time.
5.5 Disagreeing must be done efficiently.
a. Know when to stop debating and move on to agreeing about what should be done.
b. Use believability weighting as a tool rather than a substitute for decision making
by Responsible Parties.
c. Since you don’t have the time to thoroughly examine everyone’s thinking
yourself, choose your believable people wisely.
d. When you’re responsible for a decision, compare the believability-weighted
decision making of the crowd to what you believe.
5.6 Recognize that everyone has the right and responsibility to try to make sense of important
things.
a. Communications aimed at getting the best answer should involve the most
relevant people.
b. Communication aimed at educating or boosting cohesion should involve a
broader set of people than would be needed if the aim were just getting the best
answer.
c. Recognize that you don’t need to make judgments about everything.
5.7 Pay more attention to whether the decision-making system is fair than whether you get your
way.
6 Recognize How to Get Beyond Disagreements
6.1 Remember: Principles can’t be ignored by mutual agreement.
a. The same standards of behavior apply to everyone.
6.2 Make sure people don’t confuse the right to complain, give advice, and openly debate with
the right to make decisions.
a. When challenging a decision and/or a decision maker, consider the broader
context.
6.3 Don’t leave important conflicts unresolved.
a. Don’t let the little things divide you when your agreement on the big things
should bind you.
b. Don’t get stuck in disagreement—escalate or vote!
6.4 Once a decision is made, everyone should get behind it even though individuals may still
disagree.
a. See things from the higher level.
b. Never allow the idea meritocracy to slip into anarchy.
c. Don’t allow lynch mobs or mob rule.
6.5 Remember that if the idea meritocracy comes into conflict with the well-being of the
organization, it will inevitably suffer.
a. Declare “martial law” only in rare or extreme circumstances when the principles
need to be suspended.
b. Be wary of people who argue for the suspension of the idea meritocracy for the
“good of the organization.”
6.6 Recognize that if the people who have the power don’t want to operate by principles, the
principled way of operating will fail.
TO GET THE PEOPLE RIGHT . . .
7 Remember That the WHO Is More Important than the WHAT
7.1 Recognize that the most important decision for you to make is who you choose as your
Responsible Parties.
a. Understand that the most important RPs are those responsible for the goals,
outcomes, and machines at the highest levels.
7.2 Know that the ultimate Responsible Party will be the person who bears the consequences of
what is done.
a. Make sure that everyone has someone they report to.
7.3 Remember the force behind the thing.
8 Hire Right, Because the Penalties for Hiring Wrong Are Huge
8.1 Match the person to the design.
a. Think through which values, abilities, and skills you are looking for (in that
order).
b. Make finding the right people systematic and scientific.
c. Hear the click: Find the right fit between the role and the person.
d. Look for people who sparkle, not just “any ol’ one of those.”
e. Don’t use your pull to get someone a job.
8.2 Remember that people are built very differently and that different ways of seeing and
thinking make people suitable for different jobs.
a. Understand how to use and interpret personality assessments.
b. Remember that people tend to pick people like themselves, so choose
interviewers who can identify what you are looking for.
c. Look for people who are willing to look at themselves objectively.
d. Remember that people typically don’t change all that much.
8.3 Think of your teams the way that sports managers do: No one person possesses everything
required to produce success, yet everyone must excel.
8.4 Pay attention to people’s track records.
a. Check references.
b. Recognize that performance in school doesn’t tell you much about whether a
person has the values and abilities you are looking for.
c. While it’s best to have great conceptual thinkers, understand that great experience
and a great track record also count for a lot.
d. Beware of the impractical idealist.
e. Don’t assume that a person who has been successful elsewhere will be successful
in the job you’re giving them.
f. Make sure your people have character and are capable.
8.5 Don’t hire people just to fit the first job they will do; hire people you want to share your life
with.
a. Look for people who have lots of great questions.
b. Show candidates your warts.
c. Play jazz with people with whom you are compatible but who will also challenge
you.
8.6 When considering compensation, provide both stability and opportunity.
a. Pay for the person, not the job.
b. Have performance metrics tied at least loosely to compensation.
c. Pay north of fair.
d. Focus more on making the pie bigger than on exactly how to slice it so that you or
anyone else gets the biggest piece.
8.7 Remember that in great partnerships, consideration and generosity are more important than
money.
a. Be generous and expect generosity from others.
8.8 Great people are hard to find so make sure you think about how to keep them.
9 Constantly Train, Test, Evaluate, and Sort People
9.1 Understand that you and the people you manage will go through a process of personal
evolution.
a. Recognize that personal evolution should be relatively rapid and a natural
consequence of discovering one’s strengths and weaknesses; as a result, career
paths are not planned at the outset.
b. Understand that training guides the process of personal evolution.
c. Teach your people to fish rather than give them fish, even if that means letting
them make some mistakes.
d. Recognize that experience creates internalized learning that book learning can’t
replace.
9.2 Provide constant feedback.
9.3 Evaluate accurately, not kindly.
a. In the end, accuracy and kindness are the same thing.
b. Put your compliments and criticisms in perspective.
c. Think about accuracy, not implications.
d. Make accurate assessments.
e. Learn from success as well as from failure.
f. Know that most everyone thinks that what they did, and what they are doing, is
much more important than it really is.
9.4 Recognize that tough love is both the hardest and the most important type of love to give
(because it is so rarely welcomed).
a. Recognize that while most people prefer compliments, accurate criticism is more
valuable.
9.5 Don’t hide your observations about people.
a. Build your synthesis from the specifics up.
b. Squeeze the dots.
c. Don’t oversqueeze a dot.
d. Use evaluation tools such as performance surveys, metrics, and formal reviews to
document all aspects of a person’s performance.
9.6 Make the process of learning what someone is like open, evolutionary, and iterative.
a. Make your metrics clear and impartial.
b. Encourage people to be objectively reflective about their performance.
c. Look at the whole picture.
d. For performance reviews, start from specific cases, look for patterns, and get in
sync with the person being reviewed by looking at the evidence together.
e. Remember that when it comes to assessing people, the two biggest mistakes you
can make are being overconfident in your assessment and failing to get in sync on
it.
f. Get in sync on assessments in a nonhierarchical way.
g. Learn about your people and have them learn about you through frank
conversations about mistakes and their root causes.
h. Understand that making sure people are doing a good job doesn’t require
watching everything that everybody is doing at all times.
i. Recognize that change is difficult.
j. Help people through the pain that comes with exploring their weaknesses.
9.7 Knowing how people operate and being able to judge whether that way of operating will lead
to good results is more important than knowing what they did.
a. If someone is doing their job poorly, consider whether it is due to inadequate
learning or inadequate ability.
b. Training and testing a poor performer to see if he or she can acquire the required
skills without simultaneously trying to assess their abilities is a common mistake.
9.8 Recognize that when you are really in sync with someone about their weaknesses, the
weaknesses are probably true.
a. When judging people, remember that you don’t have to get to the point of
“beyond a shadow of a doubt.”
b. It should take you no more than a year to learn what a person is like and whether
they are a click for their job.
c. Continue assessing people throughout their tenure.
d. Evaluate employees with the same rigor as you evaluate job candidates.
9.9 Train, guardrail, or remove people; don’t rehabilitate them.
a. Don’t collect people.
b. Be willing to “shoot the people you love.”
c. When someone is “without a box,” consider whether there is an open box that
would be a better fit or whether you need to get them out of the company.
d. Be cautious about allowing people to step back to another role after failing.
9.10 Remember that the goal of a transfer is the best, highest use of the person in a way that benefits the
community as a whole.
a. Have people “complete their swings” before moving on to new roles.
9.11 Don’t lower the bar.
TO BUILD AND EVOLVE YOUR MACHINE . . .
10 Manage as Someone Operating a Machine to Achieve a Goal
10.1 Look down on your machine and yourself within it from the higher level.
a. Constantly compare your outcomes to your goals.
b. Understand that a great manager is essentially an organizational engineer.
c. Build great metrics.
d. Beware of paying too much attention to what is coming at you and not enough
attention to your machine.
e. Don’t get distracted by shiny objects.
10.2 Remember that for every case you deal with, your approach should have two purposes: 1) to
move you closer to your goal, and 2) to train and test your machine (i.e., your people and
your design).
a. Everything is a case study.
b. When a problem occurs, conduct the discussion at two levels: 1) the machine level
(why that outcome was produced) and 2) the case-at-hand level (what to do about
it).
c. When making rules, explain the principles behind them.
d. Your policies should be natural extensions of your principles.
e. While good principles and policies almost always provide good guidance,
remember that there are exceptions to every rule.
10.3 Understand the differences between managing, micromanaging, and not managing.
a. Managers must make sure that what they are responsible for works well.
b. Managing the people who report to you should feel like skiing together.
c. An excellent skier is probably going to be a better ski coach than a novice skier.
d. You should be able to delegate the details.
10.4 Know what your people are like and what makes them tick, because your people are your
most important resource.
a. Regularly take the temperature of each person who is important to you and to the
organization.
b. Learn how much confidence to have in your people—don’t assume it.
c. Vary your involvement based on your confidence.
10.5 Clearly assign responsibilities.
a. Remember who has what responsibilities.
b. Watch out for “job slip.”
10.6 Probe deep and hard to learn what you can expect from your machine.
a. Get a threshold level of understanding.
b. Avoid staying too distant.
c. Use daily updates as a tool for staying on top of what your people are doing and
thinking.
d. Probe so you know whether problems are likely to occur before they actually do.
e. Probe to the level below the people who report to you.
f. Have the people who report to the people who report to you feel free to escalate
their problems to you.
g. Don’t assume that people’s answers are correct.
h. Train your ear.
i. Make your probing transparent rather than private.
j. Welcome probing.
k. Remember that people who see things and think one way often have difficulty
communicating with and relating to people who see things and think another way.
l. Pull all suspicious threads.
m. Recognize that there are many ways to skin a cat.
10.7 Think like an owner, and expect the people you work with to do the same.
a. Going on vacation doesn’t mean one can neglect one’s responsibilities.
b. Force yourself and the people who work for you to do difficult things.
10.8 Recognize and deal with key-man risk.
10.9 Don’t treat everyone the same—treat them appropriately.
a. Don’t let yourself get squeezed.
b. Care about the people who work for you.
10.10 Know that great leadership is generally not what it’s made out to be.
a. Be weak and strong at the same time.
b. Don’t worry about whether or not your people like you and don’t look to them to
tell you what you should do.
c. Don’t give orders and try to be followed; try to be understood and to understand
others by getting in sync.
10.11 Hold yourself and your people accountable and appreciate them for holding you accountable.
a. If you’ve agreed with someone that something is supposed to go a certain way,
make sure it goes that way—unless you get in sync about doing it differently.
b. Distinguish between a failure in which someone broke their “contract” and a failure
in which there was no contract to begin with.
c. Avoid getting sucked down.
d. Watch out for people who confuse goals and tasks, because if they can’t make that
distinction, you can’t trust them with responsibilities.
e. Watch out for the unfocused and unproductive “theoretical should.”
10.12 Communicate the plan clearly and have clear metrics conveying whether you are progressing
according to it.
a. Put things in perspective by going back before going forward.
10.13 Escalate when you can’t adequately handle your responsibilities and make sure that the people
who work for you are proactive about doing the same.
11 Perceive and Don’t Tolerate Problems
11.1 If you’re not worried, you need to worry—and if you’re worried, you don’t need to worry.
11.2 Design and oversee a machine to perceive whether things are good enough or not good
enough, or do it yourself.
a. Assign people the job of perceiving problems, give them time to investigate, and
make sure they have independent reporting lines so that they can convey problems
without any fear of recrimination.
b. Watch out for the “Frog in the Boiling Water Syndrome.”
c. Beware of group-think: The fact that no one seems concerned doesn’t mean nothing
is wrong.
d. To perceive problems, compare how the outcomes are lining up with your goals.
e. “Taste the soup.”
f. Have as many eyes looking for problems as possible.
g. “Pop the cork.”
h. Realize that the people closest to certain jobs probably know them best.
11.3 Be very specific about problems; don’t start with generalizations.
a. Avoid the anonymous “we” and “they,” because they mask personal responsibility.
11.4 Don’t be afraid to fix the difficult things.
a. Understand that problems with good, planned solutions in place are completely
different from those without such solutions.
b. Think of the problems you perceive in a machinelike way.
12 Diagnose Problems to Get at Their Root Causes
12.1 To diagnose well, ask the following questions: 1. Is the outcome good or bad? 2. Who is
responsible for the outcome? 3. If the outcome is bad, is the Responsible Party incapable
and/or is the design bad?
a. Ask yourself: “Who should do what differently?”
b. Identify at which step in the 5-Step Process the failure occurred.
c. Identify the principles that were violated.
d. Avoid Monday morning quarterbacking.
e. Don’t confuse the quality of someone’s circumstances with the quality of their
approach to dealing with the circumstances.
f. Identifying the fact that someone else doesn’t know what to do doesn’t mean that
you know what to do.
g. Remember that a root cause is not an action but a reason.
h. To distinguish between a capacity issue and a capability issue, imagine how the
person would perform at that particular function if they had ample capacity.
i. Keep in mind that managers usually fail or fall short of their goals for one (or more)
of five reasons.
12.2 Maintain an emerging synthesis by diagnosing continuously.
12.3 Keep in mind that diagnoses should produce outcomes.
a. Remember that if you have the same people doing the same things, you should
expect the same results.
12.4 Use the following “drill-down” technique to gain an 80/20 understanding of a department or
sub-department that is having problems.
12.5 Understand that diagnosis is foundational to both progress and quality relationships.
13 Design Improvements to Your Machine to Get Around Your Problems
13.1 Build your machine.
13.2 Systemize your principles and how they will be implemented.
a. Create great decision-making machines by thinking through the criteria you are
using to make decisions while you are making them.
13.3 Remember that a good plan should resemble a movie script.
a. Put yourself in the position of pain for a while so that you gain a richer
understanding of what you’re designing for.
b. Visualize alternative machines and their outcomes, and then choose.
c. Consider second- and third-order consequences, not just first-order ones.
d. Use standing meetings to help your organization run like a Swiss clock.
e. Remember that a good machine takes into account the fact that people are
imperfect.
13.4 Recognize that design is an iterative process. Between a bad “now” and a good “then” is a
“working through it” period.
a. Understand the power of the “cleansing storm.”
13.5 Build the organization around goals rather than tasks.
a. Build your organization from the top down.
b. Remember that everyone must be overseen by a believable person who has high
standards.
c. Make sure the people at the top of each pyramid have the skills and focus to manage
their direct reports and a deep understanding of their jobs.
d. In designing your organization, remember that the 5-Step Process is the path to
success and that different people are good at different steps.
e. Don’t build the organization to fit the people.
f. Keep scale in mind.
g. Organize departments and sub-departments around the most logical groupings
based on “gravitational pull.”
h. Make departments as self-sufficient as possible so that they have control over the
resources they need to achieve their goals.
i. Ensure that the ratios of senior managers to junior managers and of junior managers
to their reports are limited to preserve quality communication and mutual
understanding.
j. Consider succession and training in your design.
k. Don’t just pay attention to your job; pay attention to how your job will be done if
you are no longer around.
l. Use “double-do” rather than “double-check” to make sure mission-critical tasks are
done correctly.
m. Use consultants wisely and watch out for consultant addiction.
13.6 Create an organizational chart to look like a pyramid, with straight lines down that don’t
cross.
a. Involve the person who is the point of the pyramid when encountering crossdepartmental or cross-sub-departmental issues.
b. Don’t do work for people in another department or grab people from another
department to do work for you unless you speak to the person responsible for
overseeing the other department.
c. Watch out for “department slip.”
13.7 Create guardrails when needed—and remember it’s better not to guardrail at all.
a. Don’t expect people to recognize and compensate for their own blind spots.
b. Consider the clover-leaf design.
13.8 Keep your strategic vision the same while making appropriate tactical changes as
circumstances dictate.
a. Don’t put the expedient ahead of the strategic.
b. Think about both the big picture and the granular details, and understand the
connections between them.
13.9 Have good controls so that you are not exposed to the dishonesty of others.
a. Investigate and let people know you are going to investigate.
b. Remember that there is no sense in having laws unless you have policemen
(auditors).
c. Beware of rubber-stamping.
d. Recognize that people who make purchases on your behalf probably will not spend
your money wisely.
e. Use “public hangings” to deter bad behavior.
13.10 Have the clearest possible reporting lines and delineations of responsibilities.
a. Assign responsibilities based on workflow design and people’s abilities, not job
titles.
b. Constantly think about how to produce leverage.
c. Recognize that it is far better to find a few smart people and give them the best
technology than to have a greater number of ordinary people who are less well
equipped.
d. Use leveragers.
13.11 Remember that almost everything will take more time and cost more money than you expect.
14 Do What You Set Out to Do
14.1 Work for goals that you and your organization are excited about and think about how your
tasks connect to those goals.
a. Be coordinated and consistent in motivating others.
b. Don’t act before thinking. Take the time to come up with a game plan.
c. Look for creative, cut-through solutions.
14.2 Recognize that everyone has too much to do.
a. Don’t get frustrated.
14.3 Use checklists.
a. Don’t confuse checklists with personal responsibility.
14.4 Allow time for rest and renovation.
14.5 Ring the bell.
15 Use Tools and Protocols to Shape How Work Is Done
15.1 Having systemized principles embedded in tools is especially valuable for an idea meritocracy.
a. To produce real behavioral change, understand that there must be internalized or
habitualized learning.
b. Use tools to collect data and process it into conclusions and actions.
c. Foster an environment of confidence and fairness by having clearly-stated
principles that are implemented in tools and protocols so that the conclusions
reached can be assessed by tracking the logic and data behind them.
16 And for Heaven’s Sake, Don’t Overlook Governance!
16.1 To be successful, all organizations must have checks and balances.
a. Even in an idea meritocracy, merit cannot be the only determining factor in
assigning responsibility and authority.
b. Make sure that no one is more powerful than the system or so important that they
are irreplaceable.
c. Beware of fiefdoms.
d. Make clear that the organization’s structure and rules are designed to ensure that its
checks-and-balances system functions well.
e. Make sure reporting lines are clear.
f. Make sure decision rights are clear.
g. Make sure that the people doing the assessing 1) have the time to be fully informed
about how the person they are checking on is doing, 2) have the ability to make the
assessments, and 3) are not in a conflict of interest that stands in the way of
carrying out oversight effectively.
h. Recognize that decision makers must have access to the information necessary to
make decisions and must be trustworthy enough to handle that information safely.
16.2 Remember that in an idea meritocracy a single CEO is not as good as a great group of leaders.
16.3 No governance system of principles, rules, and checks and balances can substitute for a great
partnership.
For any group or organization to function
well, its work principles must be aligned with
its members’ life principles.
I don’t mean that they must be aligned on everything, but I do mean that they
have to be aligned on the most important things, like the mission they’re on and
how they will be with each other.
If people in an organization feel that alignment, they will treasure their
relationships and work together harmoniously; its culture will permeate
everything they do. If they don’t, they will work for different, often conflicting,
goals and will be confused about how they should be with each other. For that
reason, it pays for all organizations—companies, governments, foundations,
schools, hospitals, and so on—to spell out their principles and values clearly and
explicitly and to operate by them consistently.
Those principles and values aren’t vague slogans, like “the customer always
comes first” or “we should strive to be the best in our industry,” but a set of
concrete directives anyone can understand, get aligned on, and carry out. As we
shift our attention from Life Principles to Work Principles, I will explain how we
went about achieving these alignments at Bridgewater and how that affected our
results. But first, I want to explain how I think about organizations.
• An organization is a machine consisting of two major
parts: culture and people.
Each influences the other, because the people who make up an organization
determine the kind of culture it has, and the culture of the organization
determines the kinds of people who fit in.
a. A great organization has both great people and a great culture. Companies that get
progressively better over time have both. Nothing is more important or more
difficult than to get the culture and people right.
b. Great people have both great character and great capabilities. By great character, I
mean they are radically truthful, radically transparent, and deeply committed to
the mission of the organization. By great capabilities, I mean they have the
abilities and skills to do their jobs excellently. People who have one without the
other are dangerous and should be removed from the organization. People who
have both are rare and should be treasured.
c. Great cultures bring problems and disagreements to the surface and solve them well,
and they love imagining and building great things that haven’t been built before. Doing
that sustains their evolution. In our case, we do that by having an idea
meritocracy that strives for meaningful work and meaningful relationships
through radical truth and radical transparency. By meaningful work, I mean
work that people are excited to get their heads into, and by meaningful
relationships I mean those in which there is genuine caring for each other (like
an extended family). I find that these reinforce each other and that being
radically truthful and radically transparent with each other makes both the work
and the relationships go better.
By constantly looking down on the machine, its managers can objectively
compare the outcomes it produces with their goals. If those outcomes are
consistent with those goals, then the machine is working effectively; if the
outcomes are inconsistent with the goals, then something is wrong with either
the design of the machine or the people who are a part of it and the problem
needs to be diagnosed so the machine can be modified. As laid out in Chapter
Two of Life Principles, this ideally happens in a 5-Step Process: 1) having clear
goals, 2) identifying the problems preventing the goals from being achieved, 3)
diagnosing what parts of the machine (i.e., which people or which designs) are
not working well, 4) designing changes, and 5) doing what is needed. This is the
fastest and most efficient way that an organization improves.
I call this process of converting problems into progress “looping,” and how it
happens through time is visualized in the diagrams to the right. In the first, a
problem occurs that takes you off track from your goals and makes things worse
than you planned.
If you identify the decline, diagnose the problems that caused it so as to get at
their root causes, come up with new designs, and then push them through, the
trajectory will loop back on itself and continue its upward ascent, like in the
second diagram.
If you don’t identify the problem, design a suboptimal solution, or fail to push
it through effectively, the decline will continue as shown in the diagram at the
bottom.
A manager’s ability to recognize when outcomes are inconsistent with goals
and then modify designs and assemble people to rectify them makes all the
difference in the world. The more often and more effectively a manager does
this, the steeper the upward trajectory.
As I explained in Life Principles, this is what I believe evolution looks like
for all organisms and organizations. Having a culture and people that will evolve
in this way is critical because the world changes quickly and in ways that can’t
possibly be anticipated. I’m sure you can think of a number of companies that
failed to identify and address their problems on time and ended up in a terminal
decline (see: BlackBerry and Palm) and a rare few that have consistently looped
well. Most don’t. For example, only six of the companies that forty years ago
made up the Dow Jones 30, which is about when Bridgewater got started, are
still in the Dow 30 today. Many of them—American Can, American Tobacco,
Bethlehem Steel, General Foods, Inco, F. W. Woolworth—don’t even exist;
some (Sears Roebuck, Johns-Manville, Eastman Kodak) are so different as to be
almost unrecognizable. And many of the standouts on the list today—Apple,
Cisco—were yet to be founded.



The rare few that have been able to evolve well over the decades have been
successful at that evolutionary/looping process, which also is the process that has
made Bridgewater progressively more successful for forty years. That is the
process I want to pass along to you.
As I mentioned earlier, nothing is more important or more difficult than to get
the culture and the people right. Whatever successes we’ve had at Bridgewater
were the result of doing that well—and whatever failures were due to our not
doing it adequately. That might seem odd because, as a global macroeconomic
investor, one might think that, above all else, I had to get the economics and
investments right, which is true. But to do that, I needed to get the people and
culture right first. And, to inspire me to do what I did, I needed to have
meaningful work and meaningful relationships.
As the entrepreneur/builder of Bridgewater, I naturally shaped the
organization to be consistent with my values and principles. I went after what I
wanted most, in the way that seemed most natural to me with the people I chose
to be with, and we and Bridgewater evolved together.
If you had asked me what my objective was when I started out, I would’ve
said it was to have fun working with people I like. Work was a game I played
with passion and I wanted to have a blast playing it with people I enjoyed and
respected. I started Bridgewater out of my apartment with a pal I played rugby
with who had no experience in the markets and a friend we hired as our assistant.
I certainly wasn’t thinking about management at the time. Management seemed
to me like something people in gray suits with slide presentations did. I never set
out to manage, let alone to have principles about work and management.
From reading Life Principles, you know that I liked to imagine and build out
new, practical concepts that never existed before. I especially loved doing these
things with people who were on the same mission with me. I treasured
thoughtful disagreement with them as a way of learning and raising our odds of
making good decisions, and I wanted all the people I worked with to be my
“partners” rather than my “employees.” In a nutshell, I was looking for
meaningful work and meaningful relationships. I quickly learned that the best
way to do that was to have great partnerships with great people.
To me, great partnerships come from sharing common values and interests,
having similar approaches to pursuing them, and being reasonable with, and
having consideration for, each other. At the same time, partners must be willing
to hold each other to high standards and work through their disagreements. The
main test of a great partnership is not whether the partners ever disagree—people
in all healthy relationships disagree—but whether they can bring their
disagreements to the surface and get through them well. Having clear processes
for resolving disagreements efficiently and clearly is essential for business
partnerships, marriages, and all other forms of partnership.
My wanting these things attracted others who wanted the same things, which
drove how we shaped Bridgewater together.36 When there were five of us it was
totally different than when there were fifty of us, which was totally different than
it was when we were five hundred, a thousand, and so on. As we grew, most
everything changed beyond recognition, except for our core values and
principles.
When Bridgewater was still a small company, the principles by which we
operated were more implicit than explicit. But as more and more new people
came in, I couldn’t take for granted that they would understand and preserve
them. I realized that I needed to write our principles out explicitly and explain
the logic behind them. I remember the precise moment when this shift occurred
—it was when the number of people at Bridgewater passed sixty-seven. Up until
then, I had personally chosen each employee’s holiday gift and written them a
lengthy personalized card, but trying to do it that year broke my back. From that
point on, an increasing number of people came in who didn’t work closely with
me, so I couldn’t assume they would understand where I was coming from or
what I was striving to create, which was an idea meritocracy built on tough love.
• Tough love is effective for achieving both great work
and great relationships.
To give you an idea of what I mean by tough love, think of Vince Lombardi,
who for me personified it. From when I was ten years old until I was eighteen,
Lombardi was head coach of the Green Bay Packers. With limited resources, he
led his team to five NFL championships. He won two NFL Coach of the Year
awards and many still call him the best coach of all time. Lombardi loved his
players and he pushed them to be great. I admired, and still admire, how
uncompromising his standards were. His players, their fans, and he himself all
benefited from his approach. I wish Lombardi had written out his principles for
me to read.
a. In order to be great, one can’t compromise the uncompromisable. Yet I see people
doing it all the time, usually to avoid making others or themselves feel
uncomfortable, which is not just backward but counterproductive. Putting
comfort ahead of success produces worse results for everyone. I both loved the
people I worked with and pushed them to be great, and I expected them to do the
same with me.
From the very beginning, I felt that the people I worked with at Bridgewater
were a part of my extended family. When they or members of their families got
sick, I put them in touch with my personal doctor to make sure that they were
well taken care of. I invited all of them to stay at my house in Vermont on
weekends and loved it when they took me up on it. I celebrated their marriages
and the births of their children with them and mourned the losses of their loved
ones. But to be clear, this was no lovefest. We were tough on each other too, so
we could all be as great as we could be. I learned that the more caring we gave
each other, the tougher we could be on each other, and the tougher we were on
each other, the better we performed and the more rewards there were for us to
share. This cycle was self-reinforcing. I found that operating this way made the
lows less low and the highs higher. It even made the bad times better than the
good ones in some important ways.
Think about some of your toughest experiences in life. I bet it is as true for
you as it has been for me that going through them with people you cared about,
who cared about you, and who were working as hard as you were for the same
mission, was incredibly rewarding. As hard as they were, we look back on some
of these challenging times as our finest moments. For most people, being part of
a great community on a shared mission is even more rewarding than money.
Numerous studies have shown there is little to no correlation between one’s
happiness and the amount of money one accumulates, yet there is a strong
correlation between one’s happiness and the quality of one’s relationships.
I laid this out in a memo to Bridgewater in 1996:
Bridgewater is not about plodding along at some kind of moderate standard,
it is about working like hell to achieve a standard that is extraordinarily
high, and then getting the satisfaction that comes along with that sort of
super-achievement.
Our overriding objective is excellence, or more precisely, constant
improvement, a superb and constantly improving company in all respects.
Conflict in the pursuit of excellence is a terrific thing. There should be no
hierarchy based on age or seniority. Power should lie in the reasoning, not
the position, of the individual. The best ideas win no matter who they come
from.
Criticism (by oneself and by others) is an essential ingredient in the
improvement process, yet, if handled incorrectly, can be destructive. It
should be handled objectively. There should be no hierarchy in the giving or
receiving of criticism.
Teamwork and team spirit are essential, including intolerance of
substandard performance. This is referring to 1) one’s recognition of the
responsibilities one has to help the team achieve its common goals and 2) the
willingness to help others (work within a group) toward these common goals.
Our fates are intertwined. One should know that others can be relied upon to
help. As a corollary, substandard performance cannot be tolerated anywhere
because it would hurt everyone.
Long-term relationships are both a) intrinsically gratifying and
b)efficient, and should be intentionally built. Turnover requires re-training
and therefore creates setbacks.
Money is a byproduct of excellence, not a goal. Our overriding objective
is excellence and constant improvement at Bridgewater. To be clear, it is not
to make lots of money. The natural extension of this is not that you should be
happy with little money. On the contrary—you should expect to make a lot. If
we operate consistently with this philosophy we should be productive and the
company should do well financially. There is comparatively little age- and
seniority-based hierarchy.
Each person at Bridgewater should act like an owner, responsible for
operating in this way and for holding others accountable to operate in this
way.
• A believability-weighted idea meritocracy is the best
system for making effective decisions.
Unlike Lombardi, whose success depended on having his players follow his
instructions, I needed my players to be independent thinkers who could bang
around their different points of view and reach better conclusions than any one
of us could come up with on our own. I needed to create an environment in
which everyone had the right and the responsibility to make sense of things for
themselves and to fight openly for what they think is best—and where the best
thinking won out. I needed a real idea meritocracy, not some theoretical version
of one. That’s because an idea meritocracy—i.e., a system that brings together
smart, independent thinkers and has them productively disagree to come up with
the best possible collective thinking and resolve their disagreements in a
believability-weighted way—will outperform any other decision-making system.
Our idea-meritocratic system evolved over the decades. At first, we just
argued like hell with each other about what was best and by thrashing through
our disagreements came up with better paths than if we had made our decisions
individually. But as Bridgewater grew and our range of disagreements and needs
to resolve them changed, we became more explicit in how this idea meritocracy
would work. We needed a system that could both effectively weigh the
believability of different people to come to the best decisions and do that in a
way that was so obviously fair everyone would recognize it as such. I knew that
without such a system, we would lose both the best thinking and the best
thinkers, and I’d be stuck with either kiss-asses or subversives who kept their
disagreements and hidden resentments to themselves.
For this all to work, I believed and still believe that we need to be radically
truthful and radically transparent with each other.
RADICAL TRUTH AND RADICAL TRANSPARENCY
By radical truth, I mean not filtering one’s thoughts and one’s questions,
especially the critical ones. If we don’t talk openly about our issues and have
paths for working through them, we won’t have partners who collectively own
our outcomes.
By radical transparency, I mean giving most everyone the ability to see most
everything. To give people anything less than total transparency would make
them vulnerable to others’ spin and deny them the ability to figure things out for
themselves. Radical transparency reduces harmful office politics and the risks of
bad behavior because bad behavior is more likely to take place behind closed
doors than out in the open.
Some people have called this way of operating radical straightforwardness.
I knew that if radical truth and radical transparency didn’t apply across the
board, we would develop two classes of people at the company—those with
power who are in the know, and those who aren’t—so I pushed them both to
their limits. To me, a pervasive Idea Meritocracy = Radical Truth + Radical
Transparency + Believability-Weighted Decision Making.
From a small group of people arguing informally about what’s true and what
to do about it, we developed approaches, technologies, and tools over the last
forty years that have taken us to a whole other level, which has been eyeopening and invaluable in ways that you can read about in the tools chapter at
the end of this book. We have always been unwavering in providing this
environment, and we let the people who didn’t like it self-select themselves out
of the company.
By being radically truthful and radically transparent, we could see that we all
have terribly incomplete and/or distorted perspectives. This isn’t unique to
Bridgewater—you would recognize the same thing if you could see into the
heads of the people around you. As explained in Understand That People Are
Wired Very Differently, people tend to see the same situations in dramatically
different ways, depending on how their brains are wired.
Seeing this will help you evolve. At first most people remain stuck in their
own heads, stubbornly clinging to the idea that their views are best and that
something is wrong with other people who don’t see things their way. But when
they repeatedly face the questions “How do you know that you’re not the wrong
one?” and “What process would you use to draw upon these different
perspectives to make the best decisions?” they are forced to confront their own
believability and see things through others’ eyes as well as their own. This shift
in perspective is what produces great collective decision making. Ideally, this
takes place in an “open-source” way, with the best ideas flowing freely, living,
dying, and producing rapid evolution based on their merits.
Most people initially find this process very uncomfortable. While most
appreciate it intellectually, they typically are challenged by it emotionally
because it requires them to separate themselves from their ego’s attachment to
being right and try to see what they have a hard time seeing. A small minority
get it and love it from the start, a slightly larger minority can’t stand it and leave
the company, and the majority stick with it, get better at it with time, and
eventually wouldn’t want to operate any other way.
IDEA
MERITOCRACY
=
RADICAL TRUTH
+
RADICAL
TRANSPARENCY
+
BELIEVABILITYWEIGHTED
DECISION MAKING
While operating this way might sound difficult and inefficient, it is actually
extremely efficient. In fact, it is much harder and much less efficient to work in
an organization in which most people don’t know what their colleagues are
really thinking. Also, when people can’t be totally open, they can’t be
themselves. As Harvard developmental psychologist Bob Kegan, who has
studied Bridgewater, likes to say, in most companies people are doing two jobs:
their actual job and the job of managing others’ impressions of how they’re
doing their job. For us, that’s terrible. We’ve found that bringing everything to
the surface 1) removes the need to try to look good and 2) eliminates time
required to guess what people are thinking. In doing so, it creates more
meaningful work and more meaningful relationships.
Here are the forces behind Bridgewater’s self-reinforcing evolutionary spiral:
1. We went from one independent thinker who wanted to achieve audacious
goals to a group of independent thinkers who wanted to achieve audacious
goals.
2. To enable these independent thinkers to have effective collective decision
making, we created an idea meritocracy based on principles that ensured
we would be radically honest and transparent with each other, have
thoughtful disagreements, and have idea-meritocratic ways of getting past
our disagreements to make decisions.
3. We recorded these decision-making principles on paper and later encoded
them into computers and made our decisions based on them.
4. This produced our successes and failures, which produced more learnings,
which were written into more principles that were systemized and acted
upon.
5. This process resulted in excellent work and excellent relationships that led
us to having well-rewarded and happy employees and clients.
6. That led us to be able to bring in more audacious independent thinkers with
more audacious goals to strengthen this self-reinforcing upward spiral.
We did that over and over again, which produced the evolutionary looping
behind Bridgewater’s forty-plus years of success. It’s shown in the diagram on
the facing page.
This really works! You don’t have to take my word for it. There are two ways
you can evaluate the likelihood that this approach and the principles that follow
from it are as powerful as I believe they are. You can 1) look at the results they
produced and 2) look at the logic behind them.
As for the results, like Lombardi’s and the Packers’, our track record speaks
for itself. We consistently got better over forty years, going from my twobedroom apartment to become the fifth most impor-tant private company in the
U.S., according to Fortune, and the world’s largest hedge fund, making more
total money for our clients than any other hedge fund in history. We have
received over one hundred industry awards and I’ve earned three lifetime
achievement awards—not to mention remarkable financial and psychological
rewards, and most importantly, amazing relationships.
But even more important than these results is the underlying cause-effect
logic behind these principles, which came before the results. Over forty years
ago, this way of being was a controversial, untested theory that nevertheless
seemed logical to me. I will explain this logic to you in the pages that follow.
That way, you can assess it for yourself.
There’s no doubt that our approach is very different. Some people have even
described Bridgewater as a cult. The truth is that Bridgewater succeeds because
it is the opposite of a cult. The essential difference between a culture of people
with shared values (which is a great thing) and a cult (which is a terrible thing) is
the extent to which there is independent thinking. Cults demand unquestioning
obedience. Thinking for yourself and challenging each other’s ideas is anti-cult
behavior, and that is the essence of what we do at Bridgewater.
WHO’S CRAZY?
Some people say that our approach is crazy, but think about it: Which approach
do you think is crazy and which one is sensible?
• One where people are truthful and transparent, or one in which most people
keep their real thoughts hidden?
• One where problems, mistakes, weaknesses, and disagreements are brought
to the surface and thoughtfully discussed, or one in which they are not
forthrightly brought to the surface and discussed?
• One in which the right to criticize is nonhierarchical, or one in which it
primarily comes from the top down?
• One in which objective pictures of what people are like are derived through
lots of data and broad triangulations of people, or one in which evaluations
of people are more arbitrary?
• One in which the organization pursues very high standards for achieving
both meaningful work and meaningful relationships, or one in which work
quality and relationship quality are not equally valued and/or the standards
aren’t as high?
Which kind of organization do you think will enable better development for
the people who work there, foster deeper relationships between them, and
produce better results? Which approach would you prefer to see the leaders and
organizations that you deal with follow? Which way of being would you prefer
the people who run our government to follow?
My bet is that after reading this book, you will agree that our way of
operating is far more sensible than conventional ways of operating. But
remember that my most fundamental principle is that you have to think for
yourself.
WHY I WROTE THIS BOOK AND HOW YOU CAN
GET THE MOST OUT OF IT
If you are inside Bridgewater, I am passing these principles on in my own words
so that you can see the dream and the approach through my eyes. Bridgewater
will evolve from where it is now based on what you and others in the next
generation of leadership want and how you go about getting it. This book is
intended to help you. How you use it is up to you. Whether or not this culture
continues is up to you and those who succeed me in the leadership role. It is my
responsibility to not be attached to Bridgewater being the way I would want it to
be. It is most important that you and others who succeed me make your own
independent choices. Like a parent with adult children, I want you all to be
strong, independent thinkers who will do well without me. I have done my best
to bring you to this point; now is the time for you to step up and for me to fade
away.
If you are outside Bridgewater and thinking about how these principles might
apply to your organization, this book is meant to prompt your thinking, not to
give you an exact formula to follow. You don’t have to adopt all or any of these
principles, though I do recommend that you consider them all. Many people who
run other organizations have adopted some of these principles, modified others,
and rejected many. Whatever you want to do with them is fine with me. These
principles provide a framework you can modify to suit your needs. Maybe you
will pursue the same goal and maybe you won’t; chances are that, in either case,
you will collect some valuable stuff. If you share my goal of having your
organization be a real idea meritocracy, I believe this book will be invaluable for
you because I’m told that no organization has thought through or pushed the
concepts of how to make a real idea meritocracy as far as Bridgewater. If doing
that is important to you and you pursue it with unwavering determination you
will encounter your own barriers, you will find your own ways around them, and
you will get there, even if imperfectly.
While these principles are good general rules, it’s important to remember that
every rule has exceptions and that no set of rules can ever substitute for common
sense. Think of these principles as being like a GPS. A GPS helps you get where
you’re going, but if you follow it blindly off a bridge—well, that would be your
fault, not the GPS’s. And just as a GPS that gives bad directions can be fixed by
updating its software, it’s important to raise and discuss exceptions to the
principles as they occur so they can evolve and improve over time.
No matter what path you choose to follow, your organization is a machine
made up of culture and people that will interact to produce outcomes, and those
outcomes will provide feedback about how well your organization is working.
Learning from this feedback should lead you to modify the culture and the
people so your organizational machine improves.
This dynamic is so important that I’ve organized Work Principles around it in
three sections: To Get the Culture Right, To Get the People Right, and To Build
and Evolve Your Machine. Each chapter within these sections begins with a
higher-level principle. Reading these will give you a good sense of the main
concepts in each chapter.
Under these higher-level principles there are a number of supporting
principles built around the many different types of decisions that need to be
made. These principles are meant for reference. Though you might want to skim
through them, I recommend using them as one would use an encyclopedia or
search engine to answer a specific question. For example, if you have to fire (or
transfer) someone, you should use the Table of Principles and go to the section
of principles about that. To make this easier, at Bridgewater we created a tool
called the “Coach” that allows people to type in their particular issue and find
the appropriate principles to help them with it.37 I will soon be making that
available to the public, along with many of the other management tools you’ll
read about in the final section of the book.
My main objective is not to sell you on these principles but to share the most
valuable lessons I’ve learned over my more than forty-year journey. My goal is
to get you to think hard about the tough tradeoffs that you will face in many
types of situations. By thinking about the tradeoffs behind the principles, you
will be able to decide for yourself which principles are best for you.
This brings me to my most fundamental work principle:
• Make your passion and your work one and the same
and do it with people you want to be with.
Work is either 1) a job you do to earn the money to pay for the life you want to
have or 2) what you do to achieve your mission, or some mix of the two. I urge
you to make it as much 2) as possible, recognizing the value of 1). If you do that,
most everything will go better than if you don’t.
Work Principles is written for those for whom work is primarily the game that
you play to follow your passion and achieve your mission.
36 We applied these ways of operating to the businesses of investing and managing. In the process of
investing I developed a practical understanding of what makes businesses and economies succeed, and in
the process of managing my company I had to develop a practical understanding of how to manage
businesses well. And I liked that my understanding of these subjects could be objectively measured via our
investment performance as well as our business performance.
37 Because Principles is an evolving document, with new principles being added and old ones getting
refined all the time, they will be changed. You will be able to find them in my forthcoming Principles app,
which you can learn about at www.principles.com.
TO GET THE CULTURE RIGHT . . .
You have to work in a culture that suits you. That’s fundamental to your
happiness and your effectiveness. You also must work in a culture that is
effective in producing great outcomes, because if you don’t, you won’t get the
psychic and material rewards that keep you motivated. In this section on culture
I will share my thoughts on how to match your culture to your needs, and I will
explain the type of culture that I wanted and that has worked so well for me: an
idea meritocracy.
In Chapter One, I explain what an idea meritocracy looks like, and explore
why radical truth and radical transparency are essential for it to work well. Being
radically truthful and radically transparent are probably the most difficult
principles to internalize, because they are so different from what most people are
used to. Because this way of being is frequently misunderstood, I tried especially
hard to be crystal clear in conveying why we operate this way and how it works
in practice.
In Chapter Two, we will turn our attention to why and how to build a culture
that fosters meaningful relationships. Besides being rewarding themselves,
meaningful relationships enable the radical truth and transparency that allow us
to hold each other accountable for producing excellence.
I believe that great cultures, like great people, recognize that making mistakes
is part of the process of learning, and that continuous learning is what allows an
organization to evolve successfully over time. In Chapter Three, we will explore
the principles for doing that well.
Of course, an idea meritocracy is based on the belief that pulling people’s
thinking together and stress-testing it produces better outcomes than when
people keep their disparate thoughts in their own heads. Chapter Four contains
principles for “getting in sync” well. Knowing how to have thoughtful
disagreements is key.
Idea meritocracies carefully weigh the merits of its members’ opinions. Since
many opinions are bad and virtually everyone is confident that theirs are good,
the process of being able to sort through them well is important to understand.
Chapter Five explains our system for believability-weighted decision making.
Since disagreements sometimes remain even after decisions are made, one
also needs principles for resolving them that are clearly communicated,
consistently adhered to, and universally recognized as fair. I go over these in
Chapter Six.
MAKE YOUR IDEA MERITOCRACY WORK IN A
WAY THAT SUITS YOU
While all of what you read here may seem challenging and complicated in
practice, if you believe as I do that there is no better way to make decisions than
to have believable people open-mindedly and assertively surface, explore, and
resolve their differences, then you will figure out what it takes to operate that
way. If an idea meritocracy doesn’t work well, the fault doesn’t lie in the
concept; it lies in people not valuing it enough to make sure that it works.
If you take nothing else away from this book, you owe it to yourself to see
what it’s like to experience an idea meritocracy. If it makes sense to you, I hope
you will take the plunge. It won’t take long for you to understand what a radical
difference it will make to your work and your relationships.
To have an Idea Meritocracy:
1) Put your honest thoughts
on the table
2) Have thoughtful
disagreement
3) Abide by agreed-upon ways
of getting past disagreement
1 Trust in Radical Truth and Radical
Transparency
Understanding what is true is essential for success, and being radically
transparent about everything, including mistakes and weaknesses, helps create
the understanding that leads to improvements. That’s not just a theory; we have
put this into practice at Bridgewater for over forty years, so we know how it
works. But like most things in life, being radically truthful and transparent has
cons as well as pros, which I will describe as accurately as possible in this
chapter.
Being radically truthful and transparent with your colleagues and expecting
your colleagues to be the same with you ensures that important issues are
apparent instead of hidden. It also enforces good behavior and good thinking,
because when you have to explain yourself, everyone can openly assess the
merits of your logic. If you are handling things well, radical transparency will
make that clear, and if you are handling things badly, radical transparency will
make that clear as well, so it helps to maintain high standards.
Radical truth and radical transparency are fundamental to having a real idea
meritocracy. The more people can see what is happening—the good, the bad,
and the ugly—the more effective they are at deciding the appropriate ways of
handling things. This approach is also invaluable for training: Learning is
compounded and accelerated when everyone has the opportunity to hear what
everyone else is thinking. As a leader, you will get the feedback essential for
your learning and for the continual improvement of the organization’s decisionmaking rules. And seeing firsthand what’s happening and why builds trust and
allows people to make the independent assessments of the evidence that a
functioning idea meritocracy requires.
ADAPTING TO RADICAL TRUTH AND RADICAL
TRANSPARENCY
It takes getting used to. Virtually everyone who joins Bridgewater believes
intellectually that radical truth and radical transparency are what they want,
because, after careful thought, that’s what they signed up for. Yet most find it
difficult to adjust to it because they struggle with the “two yous” as explained in
Understand That People Are Wired Very Differently. While their “upper-level
yous” understand the benefits of it, their “lower-level yous” tend to react with a
flight-or-fight response. Adapting typically takes about eighteen months, though
it varies from individual to individual, and there are those who never
successfully adapt to it.
Some people tell me it’s inconsistent with human nature to operate this way
—that people need to be protected from harsh truths and that such a system
could never work in practice. Our experience—and our success—have proven
that wrong. While it’s true that our way of being is not what most people are
used to, that doesn’t make it unnatural, any more than the hard physical exercise
athletes and soldiers do is unnatural. It is a fundamental law of nature that you
get stronger only by doing difficult things. While our idea meritocracy is not for
everyone, for those who do adapt to it—which is about two-thirds of those who
try it—it is so liberating and effective that it’s hard for them to imagine any
other way to be. What most people like best is knowing there is no spin.
RADICAL TRUTH AND TRANSPARENCY IN
PRACTICE
To give you an idea of what radical truth and transparency look like, I’ll share a
difficult situation we faced a few years ago when our Management Committee
began thinking about reorganizing our back office. Our back office provides the
services we need to support our trading in the markets, including trade
confirmations, settlements, record maintenance, and accounting. We had built
this team up over many years and it was full of hardworking, close-knit
employees who were part of our extended family. But at the time we were seeing
a need for new capacities that would stretch us beyond what we could do inhouse. This led our COO, Eileen Murray, to devise an innovative strategy for
spinning off this team and having them incorporated into a tailor-made group
within the Bank of New York/Mellon. It was just an exploratory conversation at
first; we had no idea whether we would pursue it, how we would pursue it, or
what that would ultimately mean for the members of our back office team.
Put yourself in the shoes of the Management Committee. When would you
tell the back office team that you were thinking of spinning off their group into
another company? Would you wait until the picture was clear? In most
organizations this kind of strategic decision would typically be kept under wraps
until it was a done deal, because bosses generally think it’s bad to create
uncertainty among employees. We believe the opposite: that the only responsible
way to operate is truthfully and transparently, so that people know what’s really
going on and can help us sort through any issues that arise. In this case, Eileen
led a town-hall meeting with the back office team right away. In the way typical
of leaders at Bridgewater, she explained that there was a lot she didn’t know and
there were a lot of questions that she wouldn’t be able to answer. This was the
harsh reality at that moment, and while it did create uncertainty, had she
followed the more traditional approach of being less open, the inevitable rumors
and speculation would’ve made things much worse.
Though the group ultimately did get spun off, we continue to have wonderful
relationships with the people in it. Not only did they cooperate fully throughout
the transition, they still come to our Christmas and Fourth of July parties and
remain a part of our extended family. Today, we have an award-winning back
office because of the innovative things this change allowed us to do. Most
importantly, since we were operating openly even while we hadn’t figured things
out, the back office team had their confidence in our truthfulness and
consideration for them reinforced, and they returned it in kind.
For me, not telling people what’s really going on so as to protect them from
the worries of life is like letting your kids grow into adulthood believing in the
Tooth Fairy or Santa Claus. While concealing the truth might make people
happier in the short run, it won’t make them smarter or more trusting in the long
run. It’s a real asset that people know they can trust what we say. For that reason
I believe that it’s almost always better to shoot straight, even when you don’t
have all the answers or when there’s bad news to convey. As Winston Churchill
said, “There is no worse course in leadership than to hold out false hopes soon to
be swept away.” People need to face harsh and uncertain realities if they are
going to learn how to deal with them—and you’ll learn a lot about the people
around you by seeing how well they do.
1.1 Realize that you have nothing to fear from knowing
the truth.
If you’re like most people, the idea of facing the unvarnished truth makes you
anxious. To get over that, you need to understand intellectually why untruths are
scarier than truths and then, through practice, get accustomed to living with
them.
If you’re sick, it’s natural to fear your doctor’s diagnosis—what if it’s cancer
or some other deadly disease? As scary as the truth may turn out to be, you will
be better off knowing it in the long run because it will allow you to seek the
most appropriate treatment. The same holds for learning painful truths about
your own strengths and weaknesses. Knowing and acting on the truth is what we
call the “big deal” at Bridgewater. It’s important not to get hung up on all those
emotion- and ego-laden “little deals” that can distract you from the overall
mission.
1.2 Have integrity and demand it from others.
Integrity comes from the Latin word integritas, meaning “one” or “whole.”
People who are one way on the inside and another way on the outside—i.e., not
“whole”—lack integrity; they have “duality” instead. While presenting your
view as something other than it is can sometimes be easier in the moment
(because you can avoid conflict, or embarrassment, or achieve some other shortterm goal), the second- and third-order effects of having integrity and avoiding
duality are immense. People who are one way on the inside and another on the
outside become conflicted and often lose touch with their own values. It’s
difficult for them to be happy and almost impossible for them to be their best.
Aligning what you say with what you think and what you think with what you
feel will make you much happier and much more successful. Thinking solely
about what’s accurate instead of how it is perceived pushes you to focus on the
most important things. It helps you sort through people and places because
you’ll be drawn to people and places that are open and honest. It’s also fairer to
those around you: Making judgments about people so that they are tried and
sentenced in your head, without asking for their perspective, is both unethical
and unproductive. Having nothing to hide relieves stress and builds trust.
a. Never say anything about someone that you wouldn’t say to them directly and don’t
try people without accusing them to their faces. Criticism is welcomed and
encouraged at Bridgewater, but there is never a good reason to bad-mouth
people behind their backs. It is counterproductive and shows a serious lack of
integrity, it doesn’t yield any beneficial change, and it subverts both the person
being badmouthed and the environment as a whole. Next to being dishonest, it is
the worst thing you can do in our community.
Managers should not talk about people who work for them if they are not in
the room. If someone is not present at a meeting where something relevant to
them is discussed, we always make sure to send them a recording of the meeting
and other relevant information.
b. Don’t let loyalty to people stand in the way of truth and the well-being of the
organization. In some companies, employees hide their employer’s mistakes, and
employers do the same in return. This is unhealthy and stands in the way of
improvement because it prevents people from bringing their mistakes and
weaknesses to the surface, encourages deception, and eliminates subordinates’
right of appeal.
The same thing applies to the idea of personal loyalty. I have regularly seen
people kept in jobs that they don’t deserve because of their personal relationship
to the boss, and this leads to unscrupulous managers trading on personal
loyalties to build fiefdoms for themselves. Judging one person by a different set
of rules than another is an insidious form of corruption that undermines the
meritocracy.
I believe in a healthier form of loyalty founded on openly exploring what is
true. Explicit, principled thinking and radical transparency are the best antidotes
for self-dealing. When everyone is held to the same principles and decision
making is done publicly, it is difficult for people to pursue their own interests at
the expense of the organization’s. In such an environment, those who face their
challenges have the most admirable character; when mistakes and weaknesses
are hidden, unhealthy character is rewarded instead.
1.3 Create an environment in which everyone has the
right to understand what makes sense and no one
has the right to hold a critical opinion without
speaking up.
Whether people have the independence and character to fight for the best
answers will depend upon their nature, but you can encourage them by creating
an atmosphere in which everyone’s first thought is to ask: “Is it true?”
a. Speak up, own it, or get out. In an idea meritocracy, openness is a responsibility;
you not only have the privilege to speak up and “fight for right” but are obliged
to do so. This extends especially to principles. Just like everything else,
principles need to be questioned and debated. What you’re not allowed to do is
complain and criticize privately—either to others or in your own head. If you
can’t fulfill this obligation, then you must go.
Of course open-mindedly exploring what’s true with others is not the same
thing as stubbornly insisting that only you are right, even after the decisionmaking machine has settled an issue and moved on. There will inevitably be
cases where you must abide by some policy or decision that you disagree with.
b. Be extremely open. Discuss your issues until you are in sync with each other or
until you understand each other’s positions and can determine what should be
done. As someone I worked with once explained, “It’s simple—just don’t filter.”
c. Don’t be naive about dishonesty. People lie more than most people imagine. I
learned that by being in the position of being responsible for everyone in the
company. While we have an exceptionally ethical group of people, in all
organizations there are dishonest people who have to be dealt with in practical
ways. For example, don’t believe most people who are caught being dishonest
when they say that they’ve seen the light and will never do it again because
chances are they will. Dishonest people are dangerous, so keeping them around
isn’t smart.
At the same time, let’s be practical. If I tried to limit my relationships to
people who never lied, I’d have nobody to work with. While I have extremely
high standards when it comes to integrity, I don’t view it in a black-white, onestrike-and-you’re-out way. I look at the severity, the circumstances, and the
patterns to try to understand whether I am dealing with a person who is a
habitual liar and will lie to me again, or with a person who is fundamentally
honest yet imperfect. I consider the significance of the dishonesty itself (Was the
person stealing a piece of cake or were they committing a felony?) as well as the
nature of our existing relationship (Is it my spouse telling the lie, a casual
acquaintance, or an employee?). Treating such cases differently is appropriate
because a basic law of justice is that the punishment should fit the crime.
1.4 Be radically transparent.
If you agree that a real idea meritocracy is an extremely powerful thing, it should
not be a great leap for you to see that giving people the right to see things for
themselves is better than forcing them to rely on information processed for them
by others. Radical transparency forces issues to the surface—most importantly
(and most uncomfortably) the problems that people are dealing with and how
they’re dealing with them—and it allows the organization to draw on the talents
and insights of all its members to solve them. Eventually, for people who get
used to it, living in a culture of radical transparency is more comfortable than
living in the fog of not knowing what’s going on and not knowing what people
really think. And it is incredibly effective. But, to be clear, like most great things
it also has drawbacks. Its biggest drawback is that it is initially very difficult for
most people to deal with uncomfortable realities. If unmanaged, it can lead to
people getting involved with more things than they should, and can lead people
who aren’t able to weigh all the information to draw the wrong conclusions.
For example, bringing all an organization’s problems to the surface and
regarding every one of them as intolerable may lead some people to wrongly
conclude that their organization has more intolerable problems than another
organization that keeps its issues under wraps. Yet which organization is more
likely to achieve excellence? One that highlights its problems and considers
them intolerable or one that doesn’t?
Don’t get me wrong: Radical transparency isn’t the same as total
transparency. It just means much more transparency than is typical. We do keep
some things confidential, such as private health matters or deeply personal
problems, sensitive details about intellectual property or security issues, the
timing of a major trade, and at least for the short term, matters that are likely to
be distorted, sensationalized, and harmfully misunderstood if leaked to the press.
In the following principles, you will get a good explanation of when and why
we’ve found it helpful to be transparent and when and why we’ve found it
inappropriate.
Frankly, when I started off being so radically transparent, I had no idea how it
would go; I just knew that it was extremely important and that I had to fight hard
and find ways to make it happen. I pushed the limits and was surprised by how
well it worked. For example, when I started taping all our meetings our lawyers
told us we were crazy because we were creating evidence that could be used
against us in court or by regulators such as the SEC. In response, I theorized that
radical transparency would reduce the risk of our doing anything wrong—and of
not dealing appropriately with our mistakes—and that the tapes would in fact
protect us. If we were handling things well, our transparency would make that
clear (provided, of course, that all parties are reasonable, which isn’t something
you can always take for granted), and if we were handling things badly, our
transparency would ensure that we would get what we deserve, which, in the
long run, would be good for us.
I didn’t know for sure at the time, but our experience has proven this theory
correct time and again. Bridgewater has had uncommonly few legal or
regulatory encounters, largely because of our radical transparency. That’s
because it’s tougher to do bad things and easier to find out what’s true and
resolve claims through radical transparency. Over the last several decades, we
have not had a single material legal or regulatory judgment against us.
Naturally, growing bigger and more successful attracts more media attention,
and reporters know that salacious and controversial stories draw more eyeballs
than balanced ones. Bridgewater is especially vulnerable to this kind of reporting
because, with our culture of bringing problems to the surface and sharing them
transparently within the company, we leave ourselves open to leaks. Would it be
better not to be transparent and so avoid such problems?
I’ve learned that the people whose opinions matter most are those who know
us best—our clients and our employees—and that our radical transparency
serves us well with them. Not only has it led to our producing better results, but
it also builds trust with our employees and clients so that mischaracterizations in
the press roll off their backs. When we discuss such situations with them, they
say that for us to not operate transparently would scare them much more.
Having this sort of understanding and support to do the right things has been
immeasurably valuable. But we wouldn’t have known about these great payoffs
if we hadn’t so steadfastly pushed the limits of this truth and transparency.
a. Use transparency to help enforce justice. When everyone can follow the
discussion leading up to a decision—either in real time in person or via taped
records and email threads—justice is more likely to prevail. Everyone is held
accountable for their thinking and anyone can weigh in on who should do what
according to shared principles. Absent such a transparent process, decisions
would be settled behind closed doors by those who have the power to do
whatever they want. With transparency, everyone is held to the same high
standards.
b. Share the things that are hardest to share. While it might be tempting to limit
transparency to the things that can’t hurt you, it is especially important to share
the things that are most difficult to share, because if you don’t share them you
will lose the trust and partnership of the people you are not sharing with. So,
when faced with the decision to share the hardest things, the question should not
be whether to share but how. The following principles will help you do this well.
c. Keep exceptions to radical transparency very rare. While I would like virtually
total transparency and wish that everyone would handle the information they
have access to responsibly to work out what’s true and what to do about it, I
realize that’s an ideal to be approached but never fully achieved. There are
exceptions to every rule, and in very rare cases, it is better not to be radically
transparent. In those unusual cases, you will need to figure out a way that
preserves the culture of radical transparency without exposing you and those you
care about to undue risks.
When weighing an exception, approach it as an expected value calculation,
taking into consideration the second- and third-order consequences. Ask yourself
whether the costs of making the case transparent and managing the risks of that
transparency outweigh the benefits. In the vast majority of cases, they don’t. I’ve
found that the most common reasons to limit broad transparency are:
1. Where the information is of a private, personal, or confidential nature and
doesn’t meaningfully impact the community at large.
2. Where sharing and managing such information puts the long-term interests
of the Bridgewater community, its clients, and our ability to uphold our
principles at risk (for instance, our proprietary investment logic or a legal
dispute).
3. Where the value of sharing the information broadly with the community is
very low and the distraction it would cause would be significant
(compensation, for instance).
What I’m saying is that I believe one should push the limits of being
transparent while remaining prudent. Because we tape virtually everything—
including our mistakes and weaknesses—for everyone to see, we are a targetrich environment for media that thrives on sensationalistic or critical gossip and
can find ways of having information leaked to them. In one case when we faced
the problem of having information leaked to the press that was intentionally
distorted and hurt our recruiting efforts, we were forced to institute some
controls on ultrasensitive information, so that only a significant number of
ultratrustworthy people received it in real time, and it was distributed to others
after a delay. The information was the sort that, in a typical company, would be
shared with just a handful but at Bridgewater was shared with nearly a hundred
trusted people. In other words, while our radical transparency in that case wasn’t
total, I pushed its limits in a practical way. It served us well because the people
who most needed the transparency got it right away and most everyone
understood that the commitment to being transparent remained very much intact,
even in challenging circumstances. People know that my intent is to always push
the limits of trying to be transparent and that the only things that would prevent
me from doing that will be the interests of the company and that I will tell them
if I can’t be transparent and why. It is in our culture to be that way and that
fosters trust, even when the transparency is less than we would like it to be.
d. Make sure those who are given radical transparency recognize their responsibilities to
handle it well and to weigh things intelligently.
People cannot be given the privilege of receiving information and then use the
information to harm the company, so rules and procedures must be in place to
ensure that doesn’t happen. For example, we provide great transparency inside
Bridgewater on the condition that Bridgewater citizens do not leak it outside; if
they do, they will be dismissed for cause (for unethical behavior). Additionally,
the rules for how issues are explored and decisions are made must be
maintained, and because different people have different perspectives, it’s
important that the paths for resolving them are followed. For example, some
people are going to make big deals out of little deals, come up with their own
wrong theories, or have problems seeing how things are evolving. Remind them
of the risks that the company takes to give them that transparency and their
responsibilities to handle the information that they get responsibly. I have found
that people appreciating this transparency and knowing that they will lose it if it
is not handled well leads them to enforce good behavior with each other.
e. Provide transparency to people who handle it well and either deny it to people who
don’t handle it well or remove those people from the organization. It is the right and
responsibility of management, and not the right of all employees, to determine
when exceptions to radical transparency should be made. Management should
restrict transparency sparingly and wisely because every time they do, it
undermines the idea meritocracy and people’s trust.
f. Don’t share sensitive information with the organization’s enemies.
Both inside and outside of any organization, there are some people who will
intentionally cause the organization harm. If these enemies are within your
organization, you need to call them out to resolve this conflict through the
organization’s system for achieving such resolutions, because working with
enemies within your “extended family” will undermine you and the “family.” If
the enemies are outside your organization and will use the information to harm
you, of course don’t share it.
1.5 Meaningful relationships and meaningful work are
mutually reinforcing, especially when supported
by radical truth and radical transparency.
The most meaningful relationships are achieved when you and others can speak
openly to each other about everything that’s important, learn together, and
understand the need to hold each other accountable to be as excellent as you can
be. When you have such relationships with those you work with, you pull each
other through challenging times; at the same time, sharing challenging work
draws you closer and strengthens your relationships. This self-reinforcing cycle
creates the success that allows you to pursue more and more ambitious goals.

2 Cultivate Meaningful Work and
Meaningful Relationships
Meaningful relationships are invaluable for building and sustaining a culture of
excellence, because they create the trust and support that people need to push
each other to do great things. If the overwhelming majority of people care about
having an excellent community, they will take care of it, which will yield both
better work and better relationships. Relationships have to be genuine, not
forced; at the same time, the culture of the community will have a big influence
on how people value relationships and how they behave with each other. To me,
a meaningful relationship is one in which people care enough about each other to
be there whenever someone needs support and they enjoy each other’s company
so much that they can have great times together both inside and outside of work.
I literally love many of the people I work with, and I respect them deeply.
I have often been asked whether relationships at Bridgewater are more like
those of a family or those of a team, the implication being that in a family there
is unconditional love and a permanent relationship, while in a team the
attachment is only as strong as the person’s contribution. Before answering this
question, I want to emphasize that either is good by me, because both families
and teams provide meaningful relationships and that neither is anything like a
typical job at a typical company, where the relationships are primarily utilitarian.
But to answer the question directly, I wanted Bridgewater to be like a family
business in which family members have to perform excellently or be cut. If I had
a family business and a family member wasn’t performing well, I would want to
let them go because I believe that it isn’t good for either the family member
(because staying in a job they’re not suited to stands in the way of their personal
evolution) or the company (because it holds back the whole community). That’s
tough love.
To give you an idea of how Bridgewater’s culture developed and how it’s
different from what you’d find at most companies, I will tell you about how we
handled benefits in our early days. When the company was just me and a small
group of people, I didn’t provide employees with health insurance; I assumed
that they would buy it on their own. But I did want to help the people I shared
my life with during their times of need. If someone I worked with got seriously
sick and couldn’t afford proper care, what was I going to do, stand by and not
help them? Of course I’d help them financially, to whatever extent I could. So
when I did begin providing health insurance to my employees, I felt that I was
insuring myself against the money I knew I’d give them if they were injured or
fell ill as much as I was insuring them.
Because I wanted to make certain that they received the best care possible,
the policies I provided allowed them to go to any doctor they chose and spend
whatever amount was required. On the other hand, I didn’t protect them against
the little things. For example, I didn’t provide dental insurance any more than I
provided car insurance, because I felt that it was their own responsibility to
protect their teeth, just as it was their own responsibility to take care of their car.
If they needed dental insurance, they could pay for it out of their own pocket.
My main point is that I didn’t approach benefits in the impersonal, transactional
way most companies do, but more like something I provided for my family. I
was more than generous with some things and expected people to take personal
responsibility for others.
When I treated my employees like extended family, I found that they
typically behaved the same way with each other and our community as a whole,
which was much more special than having a strictly quid pro quo relationship. I
can’t tell you how many people would do anything in their power to help our
community/company and wouldn’t want to work anywhere else. This is
invaluable.
As Bridgewater grew, my ability to have quality personal contact with
everyone faded, but this wasn’t a problem because the broader community
embraced this way of being with each other. This didn’t just happen; we did a lot
to help it along. For example, we put into place a policy that we would pay for
half of practically any activities that people want to do together up to a set cap
(we now support more than a hundred clubs and athletic and common-interest
groups); we paid for food and drink for those who hosted potluck dinners at their
houses; and we bought a house that employees can use for events and
celebrations. We have Christmas, Halloween, Fourth of July, and other parties
that often include family members. Eventually, others who valued this kind of
relationship took responsibility for it and it spread to become a cultural norm so
that I could just sit back and watch beauty happen.
What about the person who doesn’t give a damn about all of this meaningful
relationship stuff, who just wants to go into work, do a good job, and receive fair
compensation? Is that okay? Sure it is, and it’s common for a significant
percentage of employees. Not everyone feels the same or is expected to feel the
same about the community. It’s totally okay to opt out. We have all sorts of
people and respect whatever they want to do on their own time, as long as they
abide by the law and are considerate. But these are not the folks who will
provide the community with the skeletal strength of commitment that is essential
for it to be extraordinary over very long periods of time.
No matter how much one tries to create a culture of meaningful relationships,
the organization is bound to have some bad (intentionally harmful) people in it.
Being there isn’t good for them or the company so it’s best to find out who they
are and remove them. We have found that the higher the percentage of people
who really care about the organization, the fewer the number of bad people there
are, because the people who really care protect the community against them. We
have also found that our radical transparency helps make it clearer which are
which.
2.1 Be loyal to the common mission and not to anyone
who is not operating consistently with it.
Loyalty to specific people who are not in tight sync with the mission and how to
achieve it will create factionalism and undermine the well-being of the
community. It is often the case, and quite beautiful, that personal loyalties exist.
However, it is also often the case, and quite ugly, when personal loyalties come
into conflict with the organization’s interests.
2.2 Be crystal clear on what the deal is.
To have a good relationship, you must be clear with each other about what the
quid pro quo is—what is generous, what is fair, and what is just plain taking
advantage—and how you will be with each other.
One important thing that typically divides people is how they approach their
work. Are they working just for their paycheck or are they looking for something
more? Each of us has our own views about what is most important. I’ve made a
lot of money through my work, but I see my job as much more than as a way to
make money—it’s how I choose to live out my values around excellence,
meaningful work, and meaningful relationships. If the people I worked with
were primarily interested in making money, we would have conflicts whenever
we had to choose between upholding our values and making an easy buck. Don’t
get me wrong—of course I understand that people don’t work for personal
satisfaction alone, and that a job must be economically viable. But we all have
definite ideas about what we value and what we want our relationships to be
like, and employers and employees have to be in sync on such things.
Naturally there will be disagreement and negotiation, but some things cannot
be compromised and you and your employees must know what those things are.
This is especially true if you’re seeking to create an environment that has shared
values, a deep commitment to the mission, and high standards of behavior.
At Bridgewater, we expect people to behave in a manner that is consistent
with how people in high-quality, long-term relationships behave—that is, with a
high level of mutual consideration for each other’s interests and a clear
understanding of who is responsible for what. On the surface, that sounds nice
and straightforward, but what exactly does that mean? It is important to be clear.
Take for example a case in which an employee’s family member is diagnosed
with a severe illness, or an employee dies tragically, leaving his or her family in
a precarious situation. These things happen far more often than any of us would
like them to, and there are of course customs and laws that define the basic
accommodations and benefits (such as personal vacation days, short- and longterm disability insurance, and life insurance) that are required. But how do you
determine what kinds of assistance should be provided beyond that? What are
the principles for deciding how to handle each specific situation fairly—which
may not always mean doing the same thing in every case?
None of this is easy, but the following principles provide some guidance.
a. Make sure people give more consideration to others than they demand for themselves.
This is a requirement.
Being considerate means allowing other people to mostly do what they want,
so long as it is consistent with our principles, policies, and the law. It also means
being willing to put others ahead of your own desires. If the people on both sides
of an argument approach their disagreements in this way, we will have many
fewer disputes about who is offending whom.
Still, judgments will have to be made and lines will have to be drawn and set
down in policies.
This is the overarching guideline: It is more inconsiderate to prevent people
from exercising their rights because you are offended by them than it is for them
to do whatever it is that offends you. That said, it is inconsiderate not to weigh
the impact of one’s actions on others, so we expect people to use sensible
judgment in not doing obviously offensive things. There are some behaviors that
are clearly offensive to many people, and it is appropriate to specify and prohibit
them in clear policies. The list of those specifics, and the policies pertaining to
them, arise from specific cases. Applying this principle to them is done in much
the same way that case law is created.
b. Make sure that people understand the difference between fairness and generosity.
Sometimes people mistake generosity for not being fair. For example, when
Bridgewater arranged for a bus to shuttle people who live in New York City to
our Connecticut office, one employee asked, “It seems it would be fair to also
compensate those of us who spend hundreds of dollars on gas each month,
particularly in light of the New York City bus.” This line of thinking mistakes an
act of generosity for some for an entitlement for everyone.
Fairness and generosity are different things. If you bought two birthday gifts
for two of your closest friends, and one cost more than the other, what would
you say if the friend who got the cheaper gift accused you of being unfair?
Probably something like, “I didn’t have to get you any gift, so stop
complaining.” At Bridgewater, we are generous with people (and I am
personally generous), but we feel no obligation to be measured and equal in our
generosity.
Generosity is good and entitlement is bad, and they can easily be confused, so
be crystal clear on which is which. Decisions should be based on what you
believe is warranted in a particular circumstance and what will be most
appreciated. If you want to have a community of people who have both highquality, long-term relationships and a high sense of personal responsibility, you
can’t allow a sense of entitlement to creep in.
c. Know where the line is and be on the far side of fair. The line is what’s fair,
appropriate, or required, as distinct from what’s generous, in light of the defined
quid pro quo relationship between parties. As mentioned earlier, you should
expect people to behave in a manner consistent with how people in high-quality,
long-term relationships behave—with a high level of mutual consideration for
each other’s interests and a clear understanding of who is responsible for what.
Each should operate on the far side of fair, by which I mean giving more
consideration to others than you demand for yourself. This is different from how
people in most commercial relationships generally behave, as they tend to focus
more on their own interests than on the interests of others or of the community
as a whole. If each party says “You deserve more,” “No, you deserve more,”
rather than “I deserve more,” you are more likely to have generous, good
relationships.
d. Pay for work. While it isn’t all about the quid pro quo between the company
and the employee, this balance must be economically viable for the relationships
to be sustainable. Set policies that clearly define this quid pro quo, and be
measured, but not excessively precise, when shifting it around. While you should
by and large stick to the arrangement, you should also recognize that there are
rare, special times when employees will need a bit of extra time off and there are
times that the company will require employees to give it extra hours. The
company should pay for above-normal work one way or another, and employees
should be docked for below-normal work. The give-and-take should roughly
equal out over time. Within reasonable boundaries, nobody should worry about
the exact ebbs and flows. But if the needs of one side change on a sustained
basis, the financial arrangement will need to be readjusted to establish a new,
appropriate relationship.
2.3 Recognize that the size of the organization can pose
a threat to meaningful relationships.
When there were just a few of us, we had meaningful relationships because we
knew and liked each other. When we grew to between fifty and a hundred
people, we had a community; when we grew beyond that, the sense of
community began to slip because we didn’t all know each other in the same way.
That’s when I realized that having groups (departments) of around a hundred
(give or take about fifty) that are bound collectively by our common mission was
the best way to scale the meaningful relationship. While bigger companies tend
to be more impersonal, that is just another challenge that has to be figured out.
2.4 Remember that most people will pretend to operate
in your interest while operating in their own.
For example, most people will operate in a way that maximizes the amount of
money they will get and that minimizes the amount of work they have to do to
get it.
To see this, just leave someone unsupervised and allow them to bill you for
what they have done. Be especially wary of this conflict of interest when people
are advising you on matters that will affect how much money they earn—such as
the lawyer who spends a lot of billable hours giving you advice, or the
salesperson who advises you on what to purchase while receiving a commission
on the amount that you spend. You can’t imagine how many people I meet who
are eager to “help” me.
Don’t be naive. Strive for the highest possible percentage of your population
having meaningful work and meaningful relationships while recognizing that
there will always be some percentage of the population who won’t care for the
community and/or will do it harm.
2.5 Treasure honorable people who are capable and
will treat you well even when you’re not looking.
They are rare. Such relationships take time to build and can only be built if you
treat such people well.
3 Create a Culture in Which It Is Okay to
Make Mistakes and Unacceptable Not
to Learn from Them
Everyone makes mistakes. The main difference is that successful people learn
from them and unsuccessful people don’t. By creating an environment in which
it is okay to safely make mistakes so that people can learn from them, you’ll see
rapid progress and fewer significant mistakes. This is especially true in
organizations where creativity and independent thinking are important, as
success will inevitably require the acceptance of failure as a part of the process.
As Thomas Edison once said, “I have not failed. I’ve just found ten thousand
ways that do not work.”
Mistakes will cause you pain, but you shouldn’t try to shield yourself or
others from it. Pain is a message that something is wrong and it’s an effective
teacher that one shouldn’t do that wrong thing again. To deal with your own and
others’ weaknesses well you must acknowledge them frankly and openly and
work to find ways of preventing them from hurting you in the future. It’s at this
point that many people say, “No thanks, this isn’t for me—I’d rather not have to
deal with these things.” But this is against your and your organization’s best
interests—and will keep you from achieving your goals. It seems to me that if
you look back on yourself a year ago and aren’t shocked by how stupid you
were, you haven’t learned much. Still, few people go out of their way to embrace
their mistakes. It doesn’t have to be that way.
Remember back in Life Principles, when I told the story about the time that
Ross, then our head of trading, forgot to put in a trade for a client? The money
just sat there in cash and by the time the mistake was discovered it had cost the
client (actually Bridgewater, because we had to make good on it) a lot of money.
It was terrible and I could easily have fired Ross to make the point that nothing
less than perfection will be accepted. But that would have been
counterproductive. I would have lost a good man and it would have only
encouraged other employees to hide their mistakes, creating a culture that would
not only be dishonest but crippled in its ability to learn and grow. If Ross hadn’t
experienced that pain, he and Bridgewater would have been the worse for it.
The point I made by not firing Ross was much more powerful than firing him
would have been—I was demonstrating to him and others that it was okay to
make mistakes and unacceptable not to learn from them. After the dust settled,
Ross and I worked together to build an error log (we now call it the Issue Log),
in which traders recorded all their mistakes and bad outcomes so we could track
them and address them systematically. It has become one of the most powerful
tools we have at Bridgewater. Our environment is one in which people
understand that remarks such as “You handled that badly” are meant to be
helpful rather than punitive.
Of course, in managing others who make mistakes, it is important to know the
difference between 1) capable people who made mistakes and are self-reflective
and open to learning from them, and 2) incapable people, or capable people who
aren’t able to embrace their mistakes and learn from them. Over time I’ve found
that hiring self-reflective people like Ross is one of the most important things I
can do.
Finding this kind of person isn’t easy. I’ve often thought that parents and
schools overemphasize the value of having the right answers all the time. It
seems to me that the best students in school tend to be the worst at learning from
their mistakes, because they have been conditioned to associate mistakes with
failure instead of opportunity. This is a major impediment to their progress.
Intelligent people who embrace their mistakes and weaknesses substantially
outperform their peers who have the same abilities but bigger ego barriers.
3.1 Recognize that mistakes are a natural part of the
evolutionary process.
If you don’t mind being wrong on the way to being right you’ll learn a lot—and
increase your effectiveness. But if you can’t tolerate being wrong, you won’t
grow, you’ll make yourself and everyone around you miserable, and your work
environment will be marked by petty backbiting and malevolent barbs rather
than by a healthy, honest search for truth.
You must not let your need to be right be more important than your need to
find out what’s true. Jeff Bezos described it well when he said, “You have to
have a willingness to repeatedly fail. If you don’t have a willingness to fail,
you’re going to have to be very careful not to invent.”
a. Fail well. Everyone fails. Anyone you see succeeding is only succeeding at the
things you’re paying attention to—I guarantee they are also failing at lots of
other things. The people I respect most are those who fail well. I respect them
even more than those who succeed. That is because failing is a painful
experience while succeeding is a joyous one, so it requires much more character
to fail, change, and then succeed than to just succeed. People who are just
succeeding must not be pushing their limits. Of course the worst are those who
fail and don’t recognize it and don’t change.
b. Don’t feel bad about your mistakes or those of others. Love them! People typically
feel bad about their mistakes because they think in a shortsighted way about the
bad outcome and not about the evolutionary process of which mistakes are an
integral part. I once had a ski instructor who had also given lessons to Michael
Jordan, the greatest basketball player of all time. Jordan, he told me, reveled in
his mistakes, seeing each of them as an opportunity to improve. He understood
that mistakes are like those little puzzles that, when you solve them, give you a
gem. Every mistake that you make and learn from will save you from thousands
of similar mistakes in the future.
3.2 Don’t worry about looking good—worry about
achieving your goals.
Put your insecurities away and get on with achieving your goals. Reflect and
remind yourself that an accurate criticism is the most valuable feedback you can
receive. Imagine how silly and unproductive it would be to respond to your ski
instructor as if he were blaming you when he told you that you fell because you
didn’t shift your weight properly. It’s no different if a supervisor points out a
flaw in your work process. Fix it and move on.
a. Get over “blame” and “credit” and get on with “accurate” and “inaccurate.”
Worrying about “blame” and “credit” or “positive” and “negative” feedback
impedes the iterative process that is essential to learning. Remember that what
has already happened lies in the past and no longer matters except as a lesson for
the future. The need for phony praise needs to be unlearned.
3.3 Observe the patterns of mistakes to see if they are
products of weaknesses.
Everyone has weaknesses and they are generally revealed in the patterns of
mistakes they make. The fastest path to success starts with knowing what your
weaknesses are and staring hard at them. Start by writing down your mistakes
and connecting the dots between them. Then write down your “one big
challenge,” the weakness that stands the most in the way of your getting what
you want. Everyone has at least one big challenge. You may in fact have several,
but don’t go beyond your “big three.” The first step to tackling these
impediments is getting them out into the open.
3.4 Remember to reflect when you experience pain.
Remember this: The pain is all in your head. If you want to evolve, you need to
go where the problems and the pain are. By confronting the pain, you will see
more clearly the paradoxes and problems you face. Reflecting on them and
resolving them will give you wisdom. The harder the pain and the challenge, the
better.
Because these moments of pain are so important, you shouldn’t rush through
them. Stay in them and explore them so you can build a foundation for
improvement. Embracing your failures—and confronting the pain they cause
you and others—is the first step toward genuine improvement; it is why
confession precedes forgiveness in many societies. Psychologists call this
“hitting bottom.” If you keep doing this you will convert the pain of facing your
mistakes and weaknesses into pleasure and “get to the other side” as I explained
in Embrace Reality and Deal with It.
a. Be self-reflective and make sure your people are self-reflective. When there is pain,
the animal instinct is flight-or-fight. Calm yourself down and reflect instead. The
pain you are feeling is due to things being in conflict—maybe you’ve come up
against a terrible reality, such as the death of a friend, and are unable to accept it;
maybe you’ve been forced to acknowledge a weakness that challenges the idea
you’d had of yourself. If you can think clearly about what’s behind it, you will
learn more about what reality is like and how to better deal with it. Self-
reflectiveness is the quality that most differentiates those who evolve quickly
from those who don’t. Remember: Pain + Reflection = Progress.
b. Know that nobody can see themselves objectively. While we should all strive to see
ourselves objectively, we shouldn’t expect everyone to be able to do that well.
We all have blind spots; people are by definition subjective. For this reason, it is
everyone’s responsibility to help others learn what is true about themselves by
giving them honest feedback, holding them accountable, and working through
disagreements in an open-minded way.
c. Teach and reinforce the merits of mistake-based learning. To encourage people to
bring their mistakes into the open and analyze them objectively, managers need
to foster a culture that makes this normal and that penalizes suppressing or
covering up mistakes. We do this by making it clear that one of the worst
mistakes anyone can make is not facing up to their mistakes. This is why the use
of the Issue Log is mandatory at Bridgewater.
3.5 Know what types of mistakes are acceptable and
what types are unacceptable, and don’t allow the
people who work for you to make the unacceptable
ones.
When considering the kinds of mistakes you are willing to allow in order to
promote learning through trial and error, weigh the potential damage of a
mistake against the benefit of incremental learning. In defining what latitude I’m
willing to give people, I say, “I’m willing to let you scratch or dent the car, but I
won’t put you in a position where there’s a significant risk of your totaling it.”
PAIN
+
REFLECTION
=
PROGRESS
4 Get and Stay in Sync
Remember that for an organization to be effective, the people who make it up
must be aligned on many levels—from what their shared mission is, to how they
will treat each other, to a more practical picture of who will do what when to
achieve their goals. Yet alignment can never be taken for granted because people
are wired so differently. We all see ourselves and the world in our own unique
ways, so deciding what’s true and what to do about it takes constant work.
Alignment is especially important in an idea meritocracy, so at Bridgewater
we try to attain alignment consciously, continually, and systematically. We call
this process of finding alignment “getting in sync,” and there are two primary
ways it can go wrong: cases resulting from simple misunderstandings and those
stemming from fundamental disagreements. Getting in sync is the process of
open-mindedly and assertively rectifying both types.
Many people mistakenly believe that papering over differences is the easiest
way to keep the peace. They couldn’t be more wrong. By avoiding conflicts one
avoids resolving differences. People who suppress minor conflicts tend to have
much bigger conflicts later on, which can lead to separation, while people who
address their mini-conflicts head on tend to have the best and the longest-lasting
relationships. Thoughtful disagreement—the process of having a quality backand-forth in an open-minded and assertive way so as to see things through each
other’s eyes—is powerful, because it helps both parties see things they’ve been
blind to. But it’s not easy. While it is straightforward to have a meritocracy in
activities in which there is clarity of relative abilities (because the results speak
for themselves such as in sports, where the fastest runner wins the race), it is
much harder in a creative environment (where different points of view about
what’s best have to be resolved). If they’re not, the process of sorting through
disagreements and knowing who has the authority to decide quickly becomes
chaotic. Sometimes people get angry or stuck; a conversation can easily wind up
with two or more people spinning unproductively and unable to reach agreement
on what to do.
For these reasons, specific processes and procedures must be followed. Every
party to the discussion must understand who has what rights and which
procedures should be followed to move toward resolution. (We’ve also
developed tools for helping do this, which you can review at the end of this
book.) And everyone must understand the most fundamental principle for getting
in sync, which is that people must be open-minded and assertive at the same
time. Thoughtful disagreement is not a battle; its goal is not to convince the
other party that he or she is wrong and you are right, but to find out what is true
and what to do about it. It must also be nonhierarchical, because in an idea
meritocracy communication doesn’t just flow unquestioned from the top down.
Criticisms must also come from the bottom up.
For example, this email was sent to me by someone who worked for me after
a meeting with clients. All the senior people at Bridgewater, including me, are
routinely criticized and judged by our subordinates.
From: Jim H
To: Ray; Lionel K; Greg J; Randal S; David A
Subject: Feedback on ABC Meeting . . .
Ray- you deserve a “D-” for your performance today in the ABC meeting
and everyone that was in the room that saw you agrees on that harsh
assessment (give or take half a grade). This was especially disappointing for
two reasons: 1) You have been great in previous meetings where the subject
matter to be covered was the same, and 2) We held a specific planning
meeting yesterday to ask you to focus tightly on culture and portfolio
structuring because we had only 2 hours to have you cover those two topics,
me cover the investment process, have Greg do the observatory and have
Randal do implementation. Instead, you took a total of 62 minutes (I
measured) but worse, you rambled for 50 minutes on what I think was
portfolio structuring topics and only then got to culture and you talked about
that for 12 minutes. It was obvious to all of us that you did not prepare at all
because there is no way you could have been that disorganized at the outset
if you had prepared.
Similarly I’d like to share another case in which one of our senior managers
observed a conversation between Greg Jensen, who was then CEO, and a junior
employee, and felt that Greg was speaking to that employee in a way that
discouraged dissent and independent thinking. She raised this in feedback she
gave Greg. Greg disagreed, asserting that he was simply reminding the employee
of relevant principles and her responsibilities to either adhere to them or openly
question them. The two sought to get in sync through a series of emails, and
when that didn’t work, they raised their disagreement to the Management
Committee. A case based on the meeting in question was sent to the entire
company so everyone could judge for themselves who was right and who was
wrong. It was a good learning exercise that Greg and the senior manager
appreciated. We used it to reflect on our written principles for handling
situations like this and they both got a lot of useful feedback. If we hadn’t laid
out our principles and used them to judge cases like this, we would have people
with power making decisions however they wanted instead of in mutually
agreed-upon ways.
The principles that follow flesh out how we do this. If they are adhered to,
you will be well aligned with others and your idea meritocracy will hum with
productivity. If they are not, it will grind to a halt.
4.1 Recognize that conflicts are essential for great
relationships . . .
. . . because they are how people determine whether their principles are aligned and
resolve their differences. Everyone has his or her own principles and values, so all
relationships entail a certain amount of negotiation or debate over how people
should be with each other. What you learn about each other will either draw you
together or drive you apart. If your principles are aligned and you can work out
your differences via a process of give-and-take, you will draw closer together. If
not, you will move apart. Open discussion of differences ensures that there are
no misunderstandings. If that doesn’t happen on an ongoing basis, gaps in
perspective will widen until inevitably there is a major clash.
a. Spend lavishly on the time and energy you devote to getting in sync, because it’s the
best investment you can make. In the long run, it saves time by increasing
efficiency, but it’s important that you do it well. You will need to prioritize what
you are going to get in sync about and who you are going to get in sync with
because of time constraints. Your highest priority should be the most important
issues with the most believable and most relevant parties.
4.2 Know how to get in sync and disagree well.
It is harder to run an idea meritocracy in which disagreements are encouraged
than a top-down autocracy in which they are suppressed. But when believable
parties to disagreements are willing to learn from each other, their evolution is
faster and their decision making is far better.
The key is in knowing how to move from disagreement to decision making. It
is important that the paths for doing this are clear so that who is responsible for
doing what is known. (This is the reason I created a tool called the Dispute
Resolver, which lays out the paths and makes clear to everyone if they are
holding on to a different point of view rather than moving it along to resolution.
You can read about it in the tools appendix.)
It is essential to know where the ultimate decision-making authority lies—i.e.,
how far the power of the argument will carry relative to the power of the
assigned authority. While arguing and especially after a decision is rendered,
everyone in the idea meritocracy must remain calm and respectful of the process.
It is never acceptable to get upset if the idea meritocracy doesn’t produce the
decision that you personally wanted.
a. Surface areas of possible out-of-syncness. If you and others don’t raise your
perspectives, there’s no way you will resolve your disputes. You can surface the
areas of disagreement informally or put them on a list to go over. I personally
like to do both, though I encourage people to list their disagreements in order of
priority so I/we can more easily direct them to the right party at the right time.
The nubbiest questions (the ones that there is the greatest disagreement about)
are the most important ones to thrash out, as they often concern differences in
people’s values or their approaches to important decisions. It’s especially
important to bring these issues to the surface and examine their premises
thoroughly and unemotionally. If you don’t, they will fester and cause rot.
b. Distinguish between idle complaints and complaints meant to lead to improvement.
Many complaints either fail to take into account the full picture or reflect a
closed-minded point of view. They are what I call “chirping,” and are generally
best ignored. But constructive complaints may lead to important discoveries.
c. Remember that every story has another side. Wisdom is the ability to see both
sides and weigh them appropriately.
4.3 Be open-minded and assertive at the same time.
Being effective at thoughtful disagreement requires one to be open-minded
(seeing things through the other’s eyes) and assertive (communicating clearly
how things look through your eyes) and to flexibly process this information to
create learning and adaptation.
I have found that most people have problems being assertive and openminded at the same time. Typically they are more inclined to be assertive than
open-minded (because it’s easier to convey how they see things than to
understand how others do, and also because people tend to have ego attachments
to being right) though some people are too willing to accept others’ views at the
expense of their own. It’s important to remind people that they have to do both
—and to remember that decision making is a two-step process in which one has
to take in information as well as decide. It also helps to remind people that those
who change their minds are the biggest winners because they learned something,
whereas those who stubbornly refuse to see the truth are losers. With practice,
training, and constant reinforcement, anyone can get good at this.
a. Distinguish open-minded people from closed-minded people. Open-minded people
seek to learn by asking questions; they realize how little they know in relation to
what there is to know and recognize that they might be wrong; they are thrilled
to be around people who know more than they do because it represents an
opportunity to learn something. Closed-minded people always tell you what they
know, even if they know hardly anything. They are typically uncomfortable
being around those who know a lot more than they do.
b. Don’t have anything to do with closed-minded people. Being open-minded is much
more important than being bright or smart. No matter how much they know,
closed-minded people will waste your time. If you must deal with them,
recognize that there can be no helping them until they open their minds.
c. Watch out for people who think it’s embarrassing not to know. They’re likely to be
more concerned with appearances than actually achieving the goal; this can lead
to ruin over time.
d. Make sure that those in charge are open-minded about the questions and comments of
others. The person responsible for a decision must be able to explain the thinking
behind it openly and transparently so that everyone can understand and assess it.
In the event of disagreement, an appeal should be made to either the decision
maker’s boss or an agreed-upon, knowledgeable group of others, generally
people more knowledgeable than and senior to the decision maker.
e. Recognize that getting in sync is a two-way responsibility. In any conversation, there
is a responsibility to express and a responsibility to listen. Misinterpretations and
misunderstandings are always going to happen. Often, difficulty in
communication is due to people having different ways of thinking (e.g., leftbrained thinkers talking to right-brained thinkers). The parties involved should
always consider the possibility that one or both of them misunderstood and do a
back-and-forth so that they can get in sync. Very simple tricks—like repeating
what you’re hearing someone say to make sure you’re actually getting it—can be
invaluable. Start by assuming you’re either not communicating or listening well
instead of blaming the other party. Learn from your miscommunications so they
don’t happen again.
f. Worry more about substance than style. This is not to say that some styles aren’t
more effective than others with different people and in different circumstances,
but I often hear people complaining about the style or tone of a criticism in order
to deflect from its substance. If you think someone’s style is an issue, box it as a
separate issue to get in sync on.
g. Be reasonable and expect others to be reasonable. You have a responsibility to be
reasonable and considerate when you are advocating for your point of view and
should never let your “lower-level you” gain control, even if the other person
loses his or her temper. Their bad behavior doesn’t justify yours.
If either party to a disagreement is too emotional to be logical, the
conversation should be deferred. Pausing a few hours or even a few days in
cases where decisions do not have to be made immediately is sometimes the best
approach.
h. Making suggestions and questioning are not the same as criticizing, so don’t treat them
as if they are. A person making suggestions may not have concluded that a
mistake will be made—they could just be making doubly sure that the person
they’re talking to has taken all the risks into consideration. Asking questions to
make sure that someone hasn’t overlooked something isn’t the same thing as
saying that he or she has overlooked it (“watch out for the ice” vs. “you’re being
careless and not looking out for the ice”). Yet I often see people react to
constructive questions as if they were accusations. That is a mistake.
4.4 If it is your meeting to run, manage the
conversation.
There are many reasons why meetings go poorly, but frequently it is because of
a lack of clarity about the topic or the level at which things are being discussed
(e.g., the principle/machine level, the case-at-hand level, or the specific-fact
level).
a. Make it clear who is directing the meeting and whom it is meant to serve. Every
meeting should be aimed at achieving someone’s goals; that person is the one
responsible for the meeting and decides what they want to get out of it and how
they will do so. Meetings without someone clearly responsible run a high risk of
being directionless and unproductive.
b. Be precise in what you’re talking about to avoid confusion. It is often best to repeat
a specific question to be sure both questioner and responder are crystal clear on
what is being asked and answered. In an email, this is often as simple as cutting
and pasting the questions into the body of the text.
c. Make clear what type of communication you are going to have in light of the objectives
and priorities. If your goal is to have people with different opinions work through
their differences to try to get closer to what is true and what to do about it (openminded debate), you will run your meeting differently than if its goal is to
educate. Debating takes time, and that time increases exponentially depending
on the number of people participating in the discussion, so you have to carefully
choose the right people in the right numbers to suit the decision that needs to be
made. In any discussion try to limit the participation to those whom you value
most in light of your objectives. The worst way to pick people is based on
whether their conclusions align with yours. Group-think (people not asserting
independent views) and solo-think (people being unreceptive to the thoughts of
others) are both dangerous.
d. Lead the discussion by being assertive and open-minded. Reconciling different
points of view can be difficult and time-consuming. It is up to the meeting leader
to balance conflicting perspectives, push through impasses, and decide how to
spend time wisely.
A common question I get is: What happens when someone inexperienced
offers an opinion? If you’re running the conversation, you should be weighing
the potential cost in the time that it takes to explore their opinion versus the
potential gain in being able to assess their thinking and gain a better
understanding of what they’re like. Exploring the views of people who are still
building their track record can give you valuable insights into how they might
handle various responsibilities. Time permitting, you should work through their
reasoning with them so they can understand how they might be wrong. It’s also
your obligation to open-mindedly consider whether they’re right.
e. Navigate between the different levels of the conversation. When considering an issue
or situation, there should be two levels of discussion: the case at hand and the
relevant principles that help you decide how the machine should work. You need
to clearly navigate between these levels in order to handle the case well, test the
effectiveness of your principles, and improve the machine so similar cases will
be handled better in the future.
f. Watch out for “topic slip.” Topic slip is random drifting from topic to topic
without achieving completion on any of them. One way to avoid it is by tracking
the conversation on a whiteboard so that everyone can see where you are.
g. Enforce the logic of conversations. People’s emotions tend to heat up when there
is disagreement. Remain calm and analytical at all times; it is more difficult to
shut down a logical exchange than an emotional one. Remember too that
emotions can shade how people see reality. For example, people will sometimes
say, “I feel like (something is true)” and proceed as though it’s a fact, when
other people may interpret the same situation differently. Ask them, “Is it true?”
to ground the conversation in reality.
h. Be careful not to lose personal responsibility via group decision making. Too often
groups will make a decision to do something without assigning personal
responsibilities, so it is not clear who is supposed to follow up by doing what. Be
clear in assigning personal responsibilities.
i. Utilize the “two-minute rule” to avoid persistent interruptions. The two-minute rule
specifies that you have to give someone an uninterrupted two minutes to explain
their thinking before jumping in with your own. This ensures that everyone has
time to fully crystallize and communicate their thoughts without worrying they
will be misunderstood or drowned out by a louder voice.
j. Watch out for assertive “fast talkers.” Fast talkers are people who articulately and
assertively say things faster than they can be assessed as a way of pushing their
agenda past other people’s examination or objections. Fast talking can be
especially effective when it’s used against people worried about appearing
stupid. Don’t be one of those people. Recognize that it’s your responsibility to
make sense of things and don’t move on until you do. If you’re feeling
pressured, say something like “Sorry for being stupid, but I’m going to need to
slow you down so I can make sense of what you’re saying.” Then ask your
questions. All of them.
k. Achieve completion in conversations. The main purpose of discussion is to
achieve completion and get in sync, which leads to decisions and/or actions.
Conversations that fail to reach completion are a waste of time. When there is an
exchange of ideas, it is important to end it by stating the conclusions. If there is
agreement, say it; if not, say that. Where further action has been decided, get
those tasks on a to-do list, assign people to do them, and specify due dates. Write
down your conclusions, working theories, and to-do’s in places that will lead to
their being used as foundations for continued progress. To make sure this
happens, assign someone to make sure notes are taken and follow-through
occurs.
There is no reason to get angry because you still disagree. People can have a
wonderful relationship and disagree about some things; you don’t have to agree
on everything.
l. Leverage your communication. While open communication is very important, the
challenge is to do it in a time-efficient way—you can’t have individual
conversations with everyone. It is helpful to identify easy ways of sharing, like
open emails posted on an FAQ board or sending around videotapes or audio
recordings of key meetings. (I call such approaches “leverage.”) The challenges
become greater the higher you go in the reporting hierarchy because the number
of people affected by your actions and who also have opinions and/or questions
grows so large. In such cases, you will need even greater leverage and
prioritization (for example by having some of the questions answered by a wellequipped party who works for you or by asking people to prioritize their
questions by urgency or importance).
4.5 Great collaboration feels like playing jazz.
In jazz, there’s no script: You have to figure things out as you go along.
Sometimes you need to sit back and let others drive things; other times, you
blare it out yourself. To do the right thing at the right moment you need to really
listen to the people you’re playing with so that you can understand where they’re
going.
All great creative collaboration should feel the same way. Combining your
different skills like different instruments, improvising creatively, and at the same
time subordinating yourself to the goals of the group leads to playing great
music together. But it’s important to keep in mind what number of collaborators
will play well together: A talented duo can improvise beautifully, as can a trio or
quartet. But gather ten musicians and no matter how talented they are, it’s
probably going to be too many unless they’re carefully orchestrated.
a. 1+1=3. Two people who collaborate well will be about three times as effective
as each of them operating independently, because each will see what the other
might miss—plus they can leverage each other’s strengths while holding each
other accountable to higher standards.
b. 3 to 5 is more than 20. Three to five smart, conceptual people seeking the right
answers in an open-minded way will generally lead to the best answers. It may
be tempting to convene a larger group, but having too many people collaborate is
counterproductive, even if the members of the larger group are smart and
talented. The symbiotic advantages of adding people to a group grow
incrementally (2+1=4.25) up to a point; beyond that, adding people actually
subtracts from effectiveness. That is because 1) the marginal benefits diminish as
the group gets larger (two or three people might be able to cover most of the
important perspectives, so adding more people doesn’t bring much more) and 2)
larger group interactions are less efficient than smaller ones. Of course, what’s
best in practice depends on the quality of the people and the differences of the
perspectives that they bring and how well the group is managed.
4.6 When you have alignment, cherish it.
While there is nobody in the world who will share your point of view on
everything, there are people who will share your most important values and the
ways in which you choose to live them out. Make sure you end up with those
people.
4.7 If you find you can’t reconcile major differences—
especially in values—consider whether the
relationship is worth preserving.
There are all kinds of different people in the world, many of whom value
different kinds of things. If you find you can’t get in sync with someone on
shared values, you should consider whether that person is worth keeping in your
life. A lack of common values will lead to a lot of pain and other harmful
consequences and may ultimately drive you apart. It might be better to head all
that off as soon as you see it coming.
5 Believability Weight Your Decision
Making
In typical organizations, most decisions are made either autocratically, by a topdown leader, or democratically, where everyone shares their opinions and those
opinions that have the most support are implemented. Both systems produce
inferior decision making. That’s because the best decisions are made by an idea
meritocracy with believability-weighted decision making, in which the most
capable people work through their disagreements with other capable people who
have thought independently about what is true and what to do about it.
It is far better to weight the opinions of more capable decision makers more
heavily than those of less capable decision makers. This is what we mean by
“believability weighting.” So how do you determine who is capable at what?
The most believable opinions are those of people who 1) have repeatedly and
successfully accomplished the thing in question, and 2) have demonstrated that
they can logically explain the cause-effect relationships behind their conclusions.
When believability weighting is done correctly and consistently, it is the fairest
and the most effective decision-making system. It not only produces the best
outcomes but also preserves alignment, since even people who disagree with the
decision will be able to get behind it.
But for this to be the case, the criteria for establishing believability must be
objective and trusted by everybody. At Bridgewater everyone’s believability is
tracked and measured systematically, using tools such as Baseball Cards and the
Dot Collector that actively record and weigh their experience and track records.
In meetings we regularly take votes about various issues via our Dot Collector
app, which displays both the equal-weighted average and the believabilityweighted results (along with each person’s vote).
Typically, if both the equal-weighted average and the believability- weighted
votes align, we consider the matter resolved and move on. If the two types of
votes are at odds, we try again to resolve them and, if we can’t, we go with the
believability-weighted vote. Depending on what type of decision it is, in some
cases, a single “Responsible Party” (RP) can override a believability-weighted
vote; in others, the believability-weighted vote supersedes the RP’s decision. But
in all cases believability-weighted votes are taken seriously when there is
disagreement. Even in cases in which the RPs can overrule the believabilityweighted vote, the onus is on the RP to try to resolve the dispute before
overruling it. In my forty years at Bridgewater, I never made a decision contrary
to the believability-weighted decision because I felt that to do so was arrogant
and counter to the spirit of the idea meritocracy, though I argued like hell for
what I thought was best.
To give you an example of what this process looks like in action, during the
spring of 2012 our research teams used believability- weighted decision making
to resolve a disagreement about what would happen next as the European debt
crisis was heating up. At that time, the borrowing and debt-service needs of the
governments of Italy, Ireland, Greece, Portugal, and especially Spain had
reached levels that far exceeded their abilities to pay. We knew that the
European Central Bank would either have to make unprecedented purchases of
government bonds or allow the debt crisis to worsen to the point where defaults
and the breakup of the Eurozone would probably occur. Germany was adamantly
opposed to a bailout. It was clear that the fates of these countries’ economies,
and of the Eurozone itself, depended on how well Mario Draghi, the president of
the European Central Bank, orchestrated the ECB’s next move. But what would
he do?
Like analyzing a chess board to visualize the implications and inclinations of
the different moves of the different players, each of us looked at the situation
from every angle. After a lot of discussion we remained split: About half of us
thought the ECB would print more money to buy the bonds and about half
thought they wouldn’t, because breaking with the Germans would threaten the
Eurozone even more. While such thoughtful and open exchanges are essential,
it’s also critical to have mutually agreed-upon ways of resolving them to arrive
at the best decision. So we used our believability-weighting system to break the
stalemate.
We did that using our Dot Collector tool, which helps us surface the sources
of our disagreements in people’s different thinking characteristics and work our
way through them based on their believabilities. People have different
believability weightings for different qualities, like expertise in a particular
subject, creativity, ability to synthesize, etc. These dots are determined by a
mixture of ratings, both from peers and tests of different sorts. By looking at
these attributes, and also understanding which thinking qualities are most
essential to the situation at hand, we can make the best decisions.
In this case, we took a believability-weighted vote, with the qualities chosen
being both subject-matter expertise and ability to synthesize. Using the Dot
Collector, it became clear that those with greater believability believed Draghi
would defy Germany and print money, so that is what we went with. A few days
later, European policymakers announced a sweeping plan to buy unlimited
quantities of government bonds, so we got it right. While the believabilityweighted answer isn’t always the best answer, we have found that it is more
likely to be right than either the boss’s answer or an equal-weighted referendum.
Regardless of whether or not you use this kind of technology and structured
process for believability weighting, the most important thing is that you get the
concept. Simply look down on yourself and your team when a decision needs to
be made and consider who is most likely to be right. I assure you that, if you do,
you will make better decisions than if you don’t.
5.1 Recognize that having an effective idea meritocracy
requires that you understand the merit of each
person’s ideas.
Having a hierarchy of merit is not only consistent with an idea meritocracy but
essential for it. It’s simply not possible for everyone to debate everything all the
time and still get their work done. Treating all people equally is more likely to
lead away from truth than toward it. But at the same time, all views should be
considered in an open-minded way, though placed in the proper context of the
experiences and track records of the people expressing them.
Imagine if a group of us were getting a lesson in how to play baseball from
Babe Ruth, and someone who’d never played the game kept interrupting him to
debate how to swing the bat. Would it be helpful or harmful to the group’s
progress to ignore their different track records and experience? Of course it
would be harmful and plain silly to treat their points of view equally, because
they have different levels of believability. The most productive approach would
be to allow Ruth to give his instructions uninterrupted and then take some time
afterward to answer questions. But because I’m pretty extreme in believing that
it is important to obtain understanding rather than accepting doctrine at face
value, I would encourage the new batter not to accept what Ruth has to say as
right just because he was the greatest slugger of all time. If I were that new
batter, I wouldn’t stop questioning Ruth until I was confident I had found the
truth.
a. If you can’t successfully do something, don’t think you can tell others how it should be
done. I have seen some people who have repeatedly failed at something hold
strongly to their opinions of how it should be done, even when their opinions are
at odds with those who have repeatedly done it successfully. That is dumb and
arrogant. They should instead ask questions and seek believability-weighted
votes to help them get out of their intransigence.
b. Remember that everyone has opinions and they are often bad. Opinions are easy to
produce; everyone has plenty of them and most people are eager to share them—
even to fight for them. Unfortunately many are worthless or even harmful,
including a lot of your own.
5.2 Find the most believable people possible who
disagree with you and try to understand their
reasoning.
Having open-minded conversations with believable people who disagree with
you is the quickest way to get an education and to increase your probability of
being right.
a. Think about people’s believability in order to assess the likelihood that their opinions
are good. While it pays to be open-minded, you also have to be discerning.
Remember that the quality of the life you get will depend largely on the quality
of the decisions that you make as you pursue your goals. The best way to make
great decisions is to know how to triangulate with other, more knowledgeable
people. So be discerning about whom you triangulate with and skilled in the way
you do it.
The dilemma you face is trying to understand as accurately as you can what’s
true in order to make decisions effectively while realizing many of the opinions
you will hear won’t be worth much, including your own. Think about people’s
believability, which is a function of their capabilities and their willingness to say
what they think. Keep their track records in mind.
b. Remember that believable opinions are most likely to come from people 1) who have
successfully accomplished the thing in question at least three times, and 2) who have great
explanations of the cause-effect relationships that lead them to their conclusions. Treat
those who have neither as not believable, those who have one as somewhat
believable, and those who have both as the most believable. Be especially wary
of those who comment from the stands without having played on the field
themselves and who don’t have good logic, as they are dangerous to themselves
and others.
c. If someone hasn’t done something but has a theory that seems logical and can be stresstested, then by all means test it. Keep in mind that you are playing probabilities.
d. Don’t pay as much attention to people’s conclusions as to the reasoning that led them
to their conclusions. It is common for conversations to consist of people sharing
their conclusions rather than exploring the reasoning that led to those
conclusions. As a result, there is an overabundance of confidently expressed bad
opinions.
e. Inexperienced people can have great ideas too, sometimes far better ones than more
experienced people. That’s because experienced thinkers can get stuck in their old
ways. If you’ve got a good ear, you will be able to tell when an inexperienced
person is reasoning well. Like knowing whether someone can sing, it doesn’t
take a lot of time. Sometimes a person only has to sing a few bars for you to hear
how well they can sing. Reasoning is the same—it often doesn’t take a lot of
time to figure out if someone can do it.
f. Everyone should be up-front in expressing how confident they are in their thoughts. A
suggestion should be called a suggestion; a firmly held conviction should be
presented as such—particularly if it’s coming from someone with a strong track
record in the area in question.
5.3 Think about whether you are playing the role of a
teacher, a student, or a peer . . .
. . . and whether you should be teaching, asking questions, or debating. Too often
people flail in their disagreements because they either don’t know or don’t think
about how they should engage effectively; they just blurt out whatever they think
and argue. While everyone has the right and obligation to make sense of
everything, basic rules for engagement should be followed. Those rules and how
you should follow them depend on your relative believabilities. For example, it
would not be effective for the person who knows less to tell the person who
knows more how something should be done. It’s important to get the balance
between your assertiveness and your open-mindedness right, based on your
relative levels of understanding of the subject.
Think about whether the person you’re disagreeing with is more or less
believable than you. If you are less believable, you are more of a student and
should be more open-minded, primarily asking questions in order to understand
the logic of the person who probably knows more. If you’re more believable,
your role is more of a teacher, primarily conveying your understanding and
answering questions. And if you are approximate peers, you should have a
thoughtful exchange as equals. When there is a disagreement about who is more
believable, be reasonable and work it through. In cases when you can’t do this
alone effectively, seek out the help of an agreed-upon third party.
In all cases, try to see things through the other person’s eyes so that you can
obtain understanding. All parties should remember that the purpose of debate is
to get at truth, not to prove that someone is right or wrong, and that each party
should be willing to change their mind based on the logic and evidence.
a. It’s more important that the student understand the teacher than that the teacher
understand the student, though both are important. I have often seen less believable
people (students) insist that the more believable people (teachers) understand
their thinking and prove why the teacher is wrong before listening to what the
teacher (the more believable party) has to say. That’s backward. While
untangling the student’s thinking can be helpful, it is typically difficult and timeconsuming and puts the emphasis on what the student sees instead of on what the
teacher wants to convey. For that reason, our protocol is for the student to be
open-minded first. Once the student has taken in what the teacher has to offer,
both student and teacher will be better prepared to untangle and explore the
student’s perspective. It is also more time-efficient to get in sync this way, which
leads to the next principle.
b. Recognize that while everyone has the right and responsibility to try to make sense of
important things, they must do so with humility and radical open-mindedness. When
you are less believable, start by taking on the role of a student in a studentteacher relationship—with appropriate humility and open-mindedness. While it
is not necessarily you who doesn’t understand, you must assume this until you
have seen the issue through the other’s eyes. If the issue still doesn’t make sense
to you and you think that your teacher just doesn’t get it, appeal to other
believable people. If you still can’t reach an agreement, assume you are wrong.
If, on the other hand, you are able to convince a number of believable people of
your point of view, then you should make sure your thinking is heard and
considered by the person deciding, probably with the help of the other believable
parties. Remember that those who are higher in the reporting hierarchy have
more people they are trying to sort through on an expected value basis to get the
best thinking and more people who want to tell them what they think, so they are
time-constrained and have to play the probabilities. If your thinking has been
stress-tested by other believable people who support you, it has a greater
probability of being heard. Conversely, those higher in the reporting hierarchy
must strive to achieve the goal of getting in sync with those lower in the
hierarchy about what makes sense. The more people get in sync about what
makes sense, the more capable and committed people will be.
5.4 Understand how people came by their opinions.
Our brains work like computers: They input data and process it in accordance
with their wiring and programming. Any opinion you have is made up of these
two things: the data and your processing or reasoning. When someone says, “I
believe X,” ask them: What data are you looking at? What reasoning are you
using to draw your conclusion?
Dealing with raw opinions will get you and everyone else confused;
understanding where they come from will help you get to the truth.
a. If you ask someone a question, they will probably give you an answer, so think through
to whom you should address your questions. I regularly see people ask totally
uninformed or nonbelievable people questions and get answers that they believe.
This is often worse than having no answers at all. Don’t make that mistake. You
need to think through who the right people are. If you’re in doubt about
someone’s believability, find out.
The same is true for you: If someone asks you a question, think first whether
you’re the right person to answer it. If you’re not believable, you probably
shouldn’t have an opinion about what they’re asking, let alone share it.
Be sure to direct your comments or questions to the believable Responsible
Party or Parties for the issues you want to discuss. Feel free to include others if
you think that their input is relevant, while recognizing that the decision will
ultimately rest with whoever is responsible for it.
b. Having everyone randomly probe everyone else is an unproductive waste of time. For
heaven’s sake don’t bother directing your questions to people who aren’t
responsible or, worse still, throw your questions out there without directing them
at all.
c. Beware of statements that begin with “I think that . . .” Just because someone thinks
something doesn’t mean it’s true. Be especially skeptical of statements that
begin with “I think that I . . .” since most people can’t accurately assess
themselves.
d. Assess believability by systematically capturing people’s track records over time.
Every day is not a new day. Over time, a body of evidence builds up, showing
which people can be relied on and which cannot. Track records matter, and at
Bridgewater tools such as Baseball Cards and the Dot Collector make
everyone’s track records available for scrutiny.
5.5 Disagreeing must be done efficiently.
Working oneself through disagreements can be time-consuming, so you can
imagine how an idea meritocracy—where disagreement is not just tolerated but
encouraged—could become dysfunctional if it’s not managed well. Imagine how
inefficient it would be if a teacher ran a large class by asking each of the students
individually what they thought, and then debated with all of them, instead of
conveying their own views first and taking questions later.
People who want to disagree must keep this in mind and follow the tools and
protocols for disagreeing well.
a. Know when to stop debating and move on to agreeing about what should be done. I
have seen people who agree on the major issues waste hours arguing over
details. It’s more important to do big things well than to do the small things
perfectly. But when people disagree on the importance of debating something, it
probably should be debated. Operating otherwise would essentially give
someone (typically the boss) a de facto veto.
b. Use believability weighting as a tool rather than a substitute for decision making by
Responsible Parties. Believability-weighted decision making is a way of
supplementing and challenging the decisions of Responsible Parties, not
overruling them. As Bridgewater’s system currently exists, everyone is allowed
to give input, but their believability is weighted based on the evidence (their
track records, test results, and other data). Responsible Parties can overrule
believability-weighted voting but only at their peril. When a decision maker
chooses to bet on his own opinion over the consensus of believable others, he is
making a bold statement that will be proven right or wrong by the results.
c. Since you don’t have the time to thoroughly examine everyone’s thinking yourself,
choose your believable people wisely. Generally speaking, it’s best to choose three
believable people who care a lot about achieving the best outcome and who are
willing to openly disagree with each other and have their reasoning probed. Of
course the number three isn’t set in stone; the group could be larger or smaller.
Its ideal size depends on the amount of time available, how important the
decision is, how objectively you can assess your own and others’ decisionmaking abilities, and how important it is to have a lot of people understand the
reasoning behind the decision.
d. When you’re responsible for a decision, compare the believability- weighted decision
making of the crowd to what you believe. When they’re at odds, you should work
hard to resolve the disagreement.
If you are about to make a decision that the believability-weighted consensus
thinks is wrong, think very carefully before you proceed. It’s likely that you’re
wrong, but even if you’re right, there’s a good chance that you’ll lose respect by
overruling the process. You should try hard to get in sync, and if you still can’t
do that, you should be able to put your finger on exactly what it is you disagree
with, understand the risks of being wrong, and clearly explain your reasons and
logic to others. If you can’t do those things, you probably should suspend your
own judgment and go with the believability-weighted vote.
5.6 Recognize that everyone has the right and
responsibility to try to make sense of important
things.
There will come a point in all processes of thinking things through when you are
faced with the choice of requiring the person who sees things differently from
you to slowly work things through until you see things the same way, or going
along with the other person, even though their thinking still doesn’t seem to
make sense. I recommend the first path when you are disagreeing about
something important and the latter when it’s unimportant. I understand that the
first path can be awkward because the person you are speaking to can get
impatient. To neutralize that I suggest you simply say, “Let’s agree that I am a
dumb shit but I still need to make sense of this, so let’s move slowly to make
sure that happens.”
One should always feel free to ask questions, while remembering one’s
obligation to remain open-minded in the discussions that follow. Record your
argument so that if you can’t get in sync or make sense of things, you can send it
out so others can decide. And of course, remember that you are operating in an
idea meritocracy—be mindful of your own believability.
a. Communications aimed at getting the best answer should involve the most relevant
people. As a guide, the most relevant people to probe are your managers, direct
reports, and/or agreed experts. They are the most impacted by and most
informed about the issues under discussion, and so they are the most important
parties to be in sync with. If you can’t get in sync, you should escalate the
disagreement by raising it to the appropriate people.38
b. Communication aimed at educating or boosting cohesion should involve a broader set
of people than would be needed if the aim were just getting the best answer. Less
experienced, less believable people may not be necessary to decide an issue, but
if the issue involves them and you aren’t in sync with them, that lack of
understanding will in the long run likely undermine morale and the
organization’s efficiency. This is especially important in cases where you have
people who are both not believable and highly opinionated (the worst
combination). Unless you get in sync with them, you will drive their uninformed
opinions underground. If, on the other hand, you are willing to be challenged,
you will create an environment in which all criticisms are aired openly.
c. Recognize that you don’t need to make judgments about everything. Think about
who is responsible for something (and their believability), how much you know
about it, and your own believability. Don’t hold opinions about things you don’t
know anything about.
5.7 Pay more attention to whether the decision-making
system is fair than whether you get your way.
An organization is a community with a set of shared values and goals. Its morale
and smooth functioning should always take precedence over your need to be
right—and besides, you could be wrong. When the decision-making system is
consistently well-managed and based on objective criteria, the idea meritocracy
is more important than the happiness of any one of its members—even if that
member is you.
38 The most appropriate people are either the people you both report to (which we call the point of the
pyramid in an organizational chart) or someone you mutually agree will be a good arbiter.
6 Recognize How to Get Beyond
Disagreements
It is the rare dispute that is resolved to both parties’ equal satisfaction. Imagine
you are having an argument with your neighbor about a tree of theirs that has
fallen onto your property. Who is responsible for its removal? Who owns the
firewood? Who pays for the damage? While you might not be able to resolve the
disagreement yourselves, the legal system has procedures and guidelines that
allow it to determine what’s true and what to do about it, and once it renders its
judgment it’s done, even if one of you didn’t get what you wanted. That’s just
the way life is.
At Bridgewater, our principles and policies work in essentially the same way,
providing a path for settling disputes that’s not unlike what you’d find in the
courts (though it’s less formal). Having such a system is essential in an idea
meritocracy, because you can’t just encourage people to think independently and
fight for what they believe is true. You also have to provide them with a way to
get past their disagreements and move forward.
Managing this well is especially important at Bridgewater because we have so
much more thoughtful disagreement than other places. While in most cases
people disagreeing can work things out on their own, it is still often the case that
people can’t agree on what’s true and what to do about it. In those cases, we
follow our procedures for believability-weighted voting and go with the verdict;
or, in the cases where the RP wants to do it his/her way contrary to the vote and
has the power to do so, we accept that and move on.
In the end, people who join our idea meritocracy agree to abide by our
policies and procedures and the decisions that come out of them, just as if they
had taken a dispute to court and had to abide by its procedures and the resulting
verdict. This requires them to separate themselves from their own opinion and
avoid getting angry when a decision doesn’t go their way. If people don’t follow
the agreed-upon paths, they don’t have the right to complain about either the
people they disagree with or the idea-meritocratic system itself.
In those rare cases where our principles, policies, and procedures fail to make
clear how a disagreement should be resolved, it is everyone’s responsibility to
raise that fact so the process can be clarified and improved.
6.1 Remember: Principles can’t be ignored by mutual
agreement.
Principles are like laws—you can’t break one simply because you and someone
else agree to break it. Remember that it’s everyone’s obligation to speak up, own
it, or get out. If you don’t think the principles provide the right way to resolve a
problem or disagreement, you need to fight to change the principles, not just do
what you want to do.
a. The same standards of behavior apply to everyone. Whenever there is a dispute,
both parties are required to have equal levels of integrity, to be open-minded and
assertive, and to be equally considerate. The judges must hold the parties to the
same standards and provide feedback consistent with these standards. I have
often seen cases in which the feedback wasn’t appropriately balanced for various
reasons (to hold the stronger performer to a higher standard, to spread the
blame). This is a mistake. The person in the wrong needs to receive the strongest
message. Not operating this way could lead them to believe that the problem
wasn’t caused by them, or was caused by both parties equally. Of course, the
message should be conveyed calmly and clearly rather than emotionally to
maximize its effectiveness.
6.2 Make sure people don’t confuse the right to
complain, give advice, and openly debate with the
right to make decisions.
Everyone does not report to everyone. Responsibilities and authorities are
assigned to individuals based on assessments of their ability to handle them.
People are given the authority that they need to achieve outcomes and are held
accountable for their ability to produce them.
At the same time, they are going to be stress-tested from both directions—i.e.,
by those they report to and by those who report to them. The challenging and
probing that we encourage is not meant to second-guess their every decision but
to improve the quality of their work over time. The ultimate goal of independent
thinking and open debate is to provide the decision maker with alternative
perspectives. It doesn’t mean that decision-making authority is transitioned to
those who are probing them.
a. When challenging a decision and/or a decision maker, consider the broader context.
It’s important to view individual decisions in the broadest possible context. For
example, if the Responsible Party being challenged has a vision, and the decision
being disputed involves a small detail of that overall vision, the decision needs to
be debated and evaluated within the context of that larger vision.
6.3 Don’t leave important conflicts unresolved.
While it’s easier to avoid confrontations in the short run, the consequences of
doing so can be massively destructive in the long term. It’s critical that conflicts
actually get resolved—not through superficial compromise, but through seeking
the important, accurate conclusions. In most cases, this process should be made
transparent to relevant others (and sometimes the entire organization), both to
ensure quality decision making and to perpetuate the culture of openly working
through disputes.
a. Don’t let the little things divide you when your agreement on the big things should bind
you. Almost every group that agrees on the big things ends up fighting about less
important things and becoming enemies even though they should be bound by
the big things. This phenomenon is called the narcissism of small differences.
Take the Protestants and Catholics. Though both are followers of Christ, some of
them have been fighting for hundreds of years, even though many of them are
unable to articulate the differences that divide them, and most of those who can
articulate the differences realize that they are insignificant relative to the big
important things that should bind them together. I once saw a close family have
an irrevocable blow-out at a Thanksgiving dinner over who would cut the
turkey. Don’t let this narcissism of small differences happen to you. Understand
that nobody and nothing is perfect and that you are lucky to have by-and-large
excellent relationships. See the big picture.
b. Don’t get stuck in disagreement—escalate or vote! By practicing open-mindedness
and assertiveness, you should be able to resolve most disagreements. If not, and
if your dispute is one-on-one, you should escalate to a mutually agreed-upon
believable other. All things being equal, that should be someone higher in your
reporting chain, such as your boss. When a group can’t reach an agreement, the
person responsible for the meeting should take a believability-weighted vote.
6.4 Once a decision is made, everyone should get
behind it even though individuals may still
disagree.
A decision-making group in which those who don’t get what they want continue
to fight rather than work for what the group has decided is destined to fail—you
can see this happening all the time in companies, organizations, and even
political systems and nations. I’m not saying that people should pretend they like
the decision if they don’t, or that the matter in question can’t be revisited at a
future date. What I am saying is that in order to be effective, all groups that work
together have to operate with protocols that allow time for disagreements to be
explored, but in which dissenting minority parties recognize that group cohesion
supersedes their individual desires once they have been overruled.
The group is more important than the individual; don’t behave in a way that
undermines the chosen path.
a. See things from the higher level. You are expected to go to the higher level and
look down on yourself and others as part of a system. In other words, you must
get out of your own head, consider your views as just some among many, and
look down on the full array of points of view to assess them in an ideameritocratic way rather than just in your own possessive way. Seeing things
from the higher level isn’t just seeing other people’s point of view; it’s also
being able to see every situation, yourself, and others in the situation as though
you were looking down on them as an objective observer. If you can do this
well, you will see the situation as “another one of those,” see it through
everyone’s eyes, and have good mental maps or principles for deciding how to
handle it.
Almost all people initially find it difficult to get beyond seeing things through
just their own eyes, so I’ve developed policies and tools such as the Coach
(which connects situations to principles) that help people do this. With practice
many people can learn to develop this perspective, though others never do. You
need to know which type of person you and the people around you are. If you
can’t do this well on your own, seek the help of others. Recognize that many
people cannot see things from the higher level and distinguish those who can
from those who can’t, and either get rid of those who can’t or have good
guardrails in place to protect yourself and the organization against this inability.
By the way, it is of course okay to continue to disagree on some things as
long as you don’t keep fighting, thereby undermining the idea meritocracy. If
you continue to fight the idea meritocracy, you must go.
b. Never allow the idea meritocracy to slip into anarchy. In an idea meritocracy, there
is bound to be more disagreement than in a typical organization, but when it’s
taken to an extreme, arguing and nitpicking can undermine the idea
meritocracy’s effectiveness. At Bridgewater, I have encountered some people,
especially junior people, who mistakenly think they are entitled to argue about
whatever they want and with whomever they please. I have even seen people
band together to threaten the idea meritocracy, claiming that their right to do so
comes from the principles. They misunderstand my principles and the
boundaries within the organization. They must abide by the rules of the system,
which provide paths for resolving disagreements, and they mustn’t threaten the
system.
c. Don’t allow lynch mobs or mob rule. Part of the purpose of having a believabilityweighted system is to remove emotion from decision making. Crowds get
emotional and seek to grab control. That must be prevented. While all
individuals have the right to have their own opinions, they do not have the right
to render verdicts.
6.5 Remember that if the idea meritocracy comes into
conflict with the well-being of the organization, it
will inevitably suffer.
That’s just a matter of practicality. As you know I believe that what’s good must
work well, and that having the organization work well is of paramount
importance.
a. Declare “martial law” only in rare or extreme circumstances when the principles need
to be suspended. While all these principles exist for the well-being of the
community, there may come times when adhering to them could threaten the
community’s well-being. For example, we encountered a time when there were
leaks to the media of some things that we made radically transparent within
Bridgewater. People at Bridgewater understood that our transparency about our
weaknesses and mistakes was being used to present distorted and harmful
pictures of Bridgewater, so we had to lessen our level of transparency until we
resolved that problem. Rather than just lessening this degree of transparency, I
explained the situation and declared “martial law,” meaning that this was a
temporary suspension of the full degree of radical transparency. That way,
everyone would know both that it was an exceptional case and that we were
entering a time when the typical way of operating would be suspended.
b. Be wary of people who argue for the suspension of the idea meritocracy for the “good
of the organization.” When such arguments win out, the idea meritocracy will be
weakened. Don’t let that happen. If people respect the rules of the idea
meritocracy, there will be no conflict. I know that from my experiences over
decades. However, I also know that there will be people who put what they want
above the idea meritocracy and threaten it. Consider those people to be enemies
of the system and get rid of them.
6.6 Recognize that if the people who have the power
don’t want to operate by principles, the principled
way of operating will fail.
Ultimately, power will rule. This is true of any system. For example, it has
repeatedly been shown that systems of government have only worked when
those with the power value the principles behind the system more than they
value their own personal objectives. When people have both enough power to
undermine a system and a desire to get what they want that is greater than their
desire to maintain the system, the system will fail. For that reason the power
supporting the principles must be given only to people who value the principled
way of operating more than their individual interests (or the interests of their
faction), and people must be dealt with in a reasonable and considerate way so
t
h
a
t
t
h
e
o
v
e
r
w
h
e
l
m
i
n
g
m
aj
o
r
i
t
y
w
i
l
l
w
a
n
t
a
n
d
f
i
g
h
t
f
o
r
t
h
a
t
p
r
i
n
c
i
p
l
e
-
b
a
s
e
d
s
y
s
t
e
m.

TO GET THE PEOPLE RIGHT . . .
While we talked about an organization’s culture in the last section, its people
are even more important because they can change the culture for better or for
worse. A culture and its people are symbiotic—the culture attracts certain kinds
of people and the people in turn either reinforce or evolve the culture based on
their values and what they’re like. If you choose the right people with the right
values and remain in sync with them, you will play beautiful jazz together. If
you choose the wrong people, you will all go over the waterfall together.
Steve Jobs, who everyone thought was the secret to Apple’s success, said,
“The secret to my success is that we’ve gone to exceptional lengths to hire the
best people in the world.” I explain this concept in the next chapter, Remember
That the WHO Is More Important than the WHAT. Anyone who runs a
successful organization will tell you the same.
Yet most organizations are bad at recruiting. It starts with interviewers
picking people they like and who are like them instead of focusing on what
people are really like and how well they will fit in their jobs and careers. As I
describe in Chapter Eight, Hire Right, Because the Penalties for Hiring Wrong
Are Huge, to hire well, one needs a more scientific process that precisely
matches people’s values, abilities, and skills with the organization’s culture and
its career paths. You and your candidate need to get to know each other. You
have to let them interview your organization and you have to honestly convey to
them what it’s like, warts and all, and be crystal clear about what you can expect
from each other.
But even then, after you both say yes, you won’t know if you have a good fit
until you’ve lived together in your work and your relationships for a while. The
“interviewing” process doesn’t end when employment begins, but transitions
into a rigorous process of training, testing, sorting, and most importantly, getting
in sync, which I describe in Chapter Nine, Constantly Train, Test, Evaluate, and
Sort People.
I believe that the ability to objectively self-assess, including one’s own
weaknesses, is the most influential factor in whether a person succeeds, and that
a healthy organization is one in which people compete not so much against each
other as against the ways in which their lower-level selves get in the way. Your
goal should be to hire people who understand this, equip them with the tools and
the information they need to flourish in their jobs, and not micromanage them. If
they can’t do the job after being trained and given time to learn, get rid of them;
if they can, promote them.

7 Remember That the WHO Is More
Important than the WHAT
People often make the mistake of focusing on what should be done while
neglecting the more important question of who should be given the
responsibility for determining what should be done. That’s backward. When you
know what you need in a person to do the job well and you know what the
person you’re putting into it is like, you can pretty well visualize how things will
go.
I remember one case where one of our most talented rising executives was
putting together a transition plan so that he could move on to another role. He
arrived at a meeting with the Management Committee with binders full of
process flows and responsibility maps, detailing every aspect of the area he’d
been responsible for, and explained how he’d automated and systemized as
much of it as possible to make it foolproof. It was an impressive presentation,
but it quickly became clear that he didn’t have an answer for who was going to
take his place and what would happen if they saw things differently and put
together a different plan. Who would oversee the machine he’d built, probe it for
problems, and constantly improve it or decide to get rid of it? What qualities
would such a person need to produce the same excellent results that he had—i.e.,
what were the important job specifications we should match the person against?
Where would we go to recruit such a person?
While these kinds of questions seem obvious in retrospect, time and again I
see people overlooking them. Not knowing what is required to do the job well
and not knowing what your people are like is like trying to run a machine
without knowing how its parts work together.
When I was younger I didn’t really understand the saying, “Hire someone
better than you.” Now, after decades of hiring, managing, and firing people, I
understand that to be truly successful I need to be like a conductor of people,
many of whom (if not all) can play their instruments better than I can—and that
if I was a really great conductor, I would also be able to find a better conductor
than me and hire him or her. My ultimate goal is to create a machine that works
so well that I can just sit back and watch beauty happen.
I cannot emphasize enough how important the selection, training, testing,
evaluation, and sorting out of people is.
In the end, what you need to do is simple:
1. Remember the goal.
2. Give the goal to people who can achieve it (which is best) or tell them what
to do to achieve it (which is micromanaging and therefore less good).
3. Hold them accountable.
4. If they still can’t do the job after you’ve trained them and given them time
to learn, get rid of them.
7.1 Recognize that the most important decision for you
to make is who you choose as your Responsible
Parties.
If you put your goals in the hands of RPs who can execute those goals well, and
if you make it clear to them that they are personally responsible for achieving
those goals and doing the tasks, they should produce excellent results.
The same goes for yourself. If your designer/manager-you doesn’t have a
good reason to be confident that your worker-you is up to a given task, it would
be crazy to let yourself do the task without seeking the supervision of believable
parties. You know that there are a lot of incompetent people in the world trying
to do things they’re not good at, so the chances are good that you are one of
them. That’s just a reality and it’s okay for you to accept it and deal with it in a
way that produces good outcomes.
a. Understand that the most important RPs are those responsible for the goals, outcomes,
and machines at the highest levels. Give me someone who can be responsible for an
entire area—someone who can design, hire, and sort to achieve the goal—and I
can be comfortable things will go well. These are the most important people to
choose and manage well. Senior managers must be capable of higher-level
thinking, and understand the difference between goals and tasks—otherwise you
will have to do their jobs for them. The ability to see and value goals is largely
innate, though it improves with experience. It can be tested for, though no tests
are perfect.
7.2 Know that the ultimate Responsible Party will be
the person who bears the consequences of what is
done.
So long as you bear the consequences of failure, you are the ultimate
Responsible Party. For example, while you might choose to delegate the
responsibility of figuring out how to handle your illness to a doctor, it is your
responsibility to pick the right one, since you will bear the consequences if he
does a bad job. Or if you were building a house, would you go to an architect
and say “show me the kinds of houses I can build” or would you tell the architect
what kind of house you want to live in? This is especially true when it comes to
money. If you delegate the oversight responsibility for your finances to others,
they typically won’t hold themselves as accountable for your money as they
would their own and they won’t fire themselves if they are doing a bad job. Only
the ultimate RP can do that.
When putting someone in a position of responsibility, make sure their
incentives are aligned with their responsibilities and they experience the
consequences of the outcomes they produce. As an example, structure their deals
so that they do well or badly based on how well or badly you do in the areas they
are responsible for. This is fundamental for good management.
a. Make sure that everyone has someone they report to. Even a company’s owners
have bosses, in their case, the investors whose money is being spent to achieve
their goals. If the owners are self-funded, they still have to make their clients and
employees happy. And they can’t escape the responsibility of making sure that
their costs are acceptable and their goals are being met. Even if a person’s job is
unique, someone needs to be holding them accountable at all times.
7.3 Remember the force behind the thing.
Most people see the things around them without considering the forces that
created them. In most cases those forces were specific people with specific
qualities who worked in specific ways. Change the people and you change how
things develop; replace creators with noncreators and you stop having creations.
People tend to personify organizations (“Apple is a creative company”) while
mistakenly depersonalizing their results, thus losing sight of who did what to
produce them. That’s misguided because companies don’t make decisions—
people do.
So who are the people in your organization behind the results and culture that
make it special? Think about who they are and how they work together to make
it what it is.
8 Hire Right, Because the Penalties for
Hiring Wrong Are Huge
Remember back in Understand That People Are Wired Very Differently when I
described Bridgewater’s hit-or-miss hiring practices in its early days? At the
very beginning, we just hired people we liked. But too many of them turned out
to be bad fits. Because we liked them, we were reluctant to give up on them, and
things often went from bad to worse. So we started hiring like most companies
do, by looking at résumés, narrowing the lists, and then interviewing to get a gut
feel for who was right. But the questions we asked our candidates, unlike the
questions on a scientifically constructed personality test, were unlikely to elicit
answers truly indicative of what they were like.
What we were doing, essentially, was looking at prospective employees
through our own biased perspectives. Those of us who were linear thinkers
tended to want to hire linear thinkers; those of us who were lateral thinkers
tended to want to hire lateral thinkers. We all thought the type we chose would
perform best in all jobs, and as a result we weren’t able to accurately predict who
would succeed and who would fail in our very unusual environment. As a result,
we continued to make a lot of bad hires.
Eventually we learned from our mistakes and failures that we could improve
our hiring results in two ways: 1) by always being crisp and clear on exactly
what kind of person we were looking for, and 2) by developing our vocabulary
for and means of evaluating people’s abilities at a much more granular level.
This chapter lays out in detail the principles we’ve learned for doing this. While
we still make too many hiring mistakes, we have significantly reduced the odds
of making them by following these processes, which we continually try to
improve.
At a high level, we look for people who think independently, argue openmindedly and assertively, and above all else value the intense pursuit of truth
and excellence, and through it, the rapid improvement of themselves and the
organization. Because we treat work as more than just what we do to make a
living, we look at every potential hire not just as an employee but as someone
we’d want share our lives with. We insist that the people we work with are
considerate and have a high sense of personal accountability to do the difficult,
right things. We look for people with generous natures and high standards of
fairness. Most important, they must be able to put their egos aside and assess
themselves candidly.
Whether you choose to look for these same traits or others, the most
important thing you can do is understand that hiring is a high-risk gamble that
needs to be approached deliberately. A lot of time, effort, and resources go into
hiring and developing new employees before it’s clear whether or not they are
good fits. Months or even years and countless dollars can be wasted in training
and retraining. Some of those costs are intangible, including loss of morale and a
gradual diminishment of standards as people who aren’t excellent in their roles
bump into each other; other costs from bad outcomes can be measured all too
easily in dollars and cents. So whenever you think you are ready to make
someone an offer, think one last time about the important things that might go
wrong and what else you can do to better assess those risks and raise your
probability of being right.
8.1 Match the person to the design.
When building a “machine,” design precedes people because the type of people
you will need will depend on the design. As you design, create a clear mental
image of the attributes required for each person to do their job well. It is futile to
give responsibilities to people who do not have the qualities required to succeed.
It frustrates, and inevitably angers, all parties, which is damaging to the
environment.
In order to match a person to the design, start by creating a spec sheet so that
there will be a consistent set of criteria that can be applied from recruiting
through performance reviews. Bridgewater’s spec sheets use the same bank of
qualities as our Baseball Cards.
Don’t design jobs to fit people; over time, this almost always turns out to be a
mistake. This often happens when someone you are reluctant to let go doesn’t
work out, and there is an inclination to try to find out what else that person can
do. Frequently managers fail to be objective about their own strengths and
weaknesses, and put themselves into roles that they’re not a click for.
a. Think through which values, abilities, and skills you are looking for (in that order).
Values are the deep-seated beliefs that motivate behaviors and determine
people’s compatibilities with each other. People will fight for their values, and
they are likely to fight with people who don’t share them. Abilities are ways of
thinking and behaving. Some people are great learners and fast processors;
others possess the ability to see things at a higher level. Some focus more on the
particulars; still others think creatively or logically or with supreme
organization. Skills are learned tools, such as being able to speak a foreign
language or write computer code. While values and abilities are unlikely to
change much, most skills can be acquired in a limited amount of time (e.g.,
software proficiency can be learned) and often change in worth (today’s most indemand programming language is likely to be obsolete in a few years).
It is important for you to know what mix of qualities is impor-tant to fit each
role and, more broadly, what values and abilities are required in people with
whom you can have successful relationships. In picking people for long-term
relationships, values are most important, abilities come next, and skills are the
least important. Yet most people make the mistake of choosing skills and
abilities first and overlooking values. We value people most who have what I
call the three C’s: character, common sense, and creativity.
If your people are bound by a sense of community and mission and they are
capable, you will have an extraordinary organization. Some people will value the
mission and community and others won’t. Since at Bridgewater the key shared
values that maintain our culture are meaningful work and meaningful
relationships, radical truth and radical transparency, an open-minded willingness
to explore harsh realities including one’s own weaknesses, a sense of ownership,
a drive for excellence, and the willingness to do the good but difficult things, we
look for highly capable people who deeply want all of those things.
b. Make finding the right people systematic and scientific. The process for choosing
people should be systematically built out and evidence-based. You need to have
a people-hiring machine in which the goals are clearly stated so that the
outcomes can be compared with them and the machine (the design and the
people) producing the outcomes can evolve to improve.
Organizations typically hire people by having job candidates’ resumes
reviewed by semi-random people based on semi-random criteria, which leads
them to invite in candidates to have semi-random groups of people ask the
candidates semi-random questions and then make their choices of whom to offer
jobs based on the consensus of how they liked them. You need to make sure that
each one of those steps is done more systematically and purposefully. For
example, you should think through what questions are asked and how the
different answers candidates give differentiate them in the ways that you are
seeking to differentiate them. You should also save all of those answers so you
can learn about how indicative they might be of subsequent behaviors and
performance. I do not mean that the human dimension or art of the hiring
process should be eliminated—the personal values and esprit de corps part of a
relationship are critically important and can’t be fully measured by data.
Sometimes the twinkle in the eye and the facial expressions are telling.
However, even for those areas where people’s subjective interpretations are
important, you can still use data and a scientific approach to be more objective—
for example, you can capture data to assess the track records of those making the
interpretations.
c. Hear the click: Find the right fit between the role and the person.Remember that
your goal is to put the right people in the right design. First understand the
responsibilities of the role and the qualities needed to fulfill them, then ascertain
whether an individual has them. When you’re doing this well, there should
almost be an audible “click” as the person you’re hiring fits into his or her role.
d. Look for people who sparkle, not just “any ol’ one of those.” Too many people get
hired because they are just “one of those.” If you’re looking for a plumber you
might be inclined to fill the job with the first experienced plumber you interview,
without ascertaining whether he has the qualities of an outstanding plumber. Yet
the difference between an ordinary plumber versus an outstanding one is huge.
When reviewing any candidate’s background, you must identify whether they
have demonstrated themselves to be extraordinary in some way. The most
obvious demonstration is outstanding performance within an outstanding peer
group. If you’re less than excited to hire someone for a particular job, don’t do it.
The two of you will probably make each other miserable.
e. Don’t use your pull to get someone a job. It is unacceptable to use your personal
influence to help someone get a job because doing so undermines the
meritocracy. It’s not good for the job seeker, because it conveys they did not
really earn it; it is not good for the person doing the hiring, because it
undermines their authority; and it is not good for you because it demonstrates
you will compromise merit for friends. It is an insidious form of corruption and
it must not be tolerated. The most you can do at Bridgewater in this respect is to
provide a reference for someone you know well enough to endorse. Even though
Bridgewater is my company, I have never deviated from this policy.
8.2 Remember that people are built very differently
and that different ways of seeing and thinking
make people suitable for different jobs.
Some ways of thinking will serve you well for some purposes and serve you
poorly for others. It is highly desirable to understand one’s own and others’ ways
of thinking and their best applications. Some qualities are more suitable for some
jobs. For example, you might not want to hire a highly introverted person as a
salesman. That’s not to say an introvert can’t do that job; it’s just that a
gregarious person is likely to be more satisfied in the role and do a better job.
If you’re not naturally good at one type of thinking, it doesn’t mean you’re
precluded from paths that require it. It does, however, require that you either
work with someone who has that required way of thinking (which works best) or
learn to think differently (which is difficult or even impossible).
On the other hand, sometimes I see people dealing with each other, especially
in groups, without regard for these differences. They are like the parable of the
blind men touching different parts of an elephant and arguing about what it is.
Just think about how much better it would be if people were open-minded
enough to realize that none of them have the complete picture. Both people
expressing their own views and those considering others’ views need to take
each other’s differences into account. These differences are real, so it’s dumb to
pretend they don’t exist.
a. Understand how to use and interpret personality assessments. Personality
assessments are valuable tools for getting a quick picture of what people are like
in terms of their abilities, preferences, and style. They are often more objective
and reliable than interviews.
b. Remember that people tend to pick people like themselves, so choose interviewers who
can identify what you are looking for. If you’re looking for a visionary, pick a
visionary to do the interview in which you probe for vision. If you are looking
for a mix of qualities, assemble a group of interviewers who embody those
qualities collectively. Don’t choose interviewers whose judgment you don’t trust
(in other words, make sure they are believable).
c. Look for people who are willing to look at themselves objectively.
Everybody has strengths and weaknesses. The key to success is understanding
one’s weaknesses and successfully compensating for them. People who lack that
ability fail chronically.
d. Remember that people typically don’t change all that much. This is especially true
over short periods of time like a year or two, yet most people want to assume
that when someone does something wrong the person will learn the lesson and
change. That’s naive. It is best to assume that they won’t change unless there is
good evidence to the contrary that they will.
It’s better to bet on changes you have seen than those you hope for.
8.3 Think of your teams the way that sports managers
do: No one person possesses everything required
to produce success, yet everyone must excel.
Teams should operate like those in professional sports, where different skills are
required to play different positions. Excellence in each is mandatory, the success
of the mission is uncompromisable, and members that don’t measure up may
need to be cut. When teams operate with such high standards and shared values,
extraordinary relationships are likely to develop.
8.4 Pay attention to people’s track records.
People’s personalities are pretty well formed before they come to you, and
they’ve been leaving their fingerprints all over the place since childhood; anyone
is fairly knowable if you do your homework. You have to get at their values,
abilities, and skills: Do they have a track record of excellence in what you’re
expecting them to do? Have they done the thing you want them to do
successfully at least three times? If not, you’re making a lower-probability bet,
so you want to have really good reasons for doing so. That doesn’t mean you
should never allow yourself or others to do anything new; of course you should.
But do it with appropriate caution and with guardrails. That is, have an
experienced person oversee the inexperienced person, yourself included (if you
fit that description).
a. Check references. Don’t rely exclusively on the candidate for information about
their track record: Talk to believable people who know them, look for
documented evidence, and ask for past reviews from their bosses, subordinates,
and peers. As much as possible, you want to get a clear and objective picture of
the path that they have chosen for themselves and how they have evolved along
the way. I’ve seen plenty of people who claimed to be successful elsewhere
operate ineffectively at Bridgewater. A closer look often revealed that they were
either not as successful as they portrayed themselves or they got credit for
others’ accomplishments.
b. Recognize that performance in school doesn’t tell you much about whether a person
has the values and abilities you are looking for. Largely because they are the easiest
to measure, memory and processing speed tend to be the abilities that determine
success in school, so school performance is an excellent gauge of these qualities.
School performance is also a good gauge of a person’s determination to succeed,
as well as their willingness and ability to follow directions. But when it comes to
assessing a candidate’s common sense, vision, creativity, or decision-making
abilities, school records are of limited value. Since those traits are the most
important, you must look beyond school to ascertain whether an applicant has
them.
c. While it’s best to have great conceptual thinkers, understand that great experience and
a great track record also count for a lot. There are all sorts of jobs and they require
all types of people to handle them. I am frequently biased toward finding the
entrepreneur type—a clever, open-minded scrapper who will find the best
solution—and I have often been disappointed. On the other hand, sometimes I
have found a master craftsman who has devoted decades to his specialty who I
could completely rely on. What keeps coming to my mind is Malcolm
Gladwell’s rule that it takes ten thousand hours of doing something to build
expertise—and the value of looking at batting averages to judge how well a
person can hit. One way you can tell how well a talented rookie will do relative
to a proven star is to get them into a debate with each other and see how well
they each hold up.
d. Beware of the impractical idealist. Idealistic people who have moralistic notions
about how people should behave without understanding how people really do
behave do more harm than good.
As a global macroeconomist and businessman and as a philanthropist I have
seen this repeatedly in all those domains. I have come to believe that as wellintentioned as they are, impractical idealists are dangerous and destructive,
whereas practical idealists make the world a better place. To be practical one
needs to be a realist—to know where people’s interests lie and how to design
machines that produce results, as well as metrics that measure those benefits in
relation to the costs. Without such measures, waste will limit or erase the
benefits, and with them the benefits will keep flowing.
e. Don’t assume that a person who has been successful elsewhere will be successful in the
job you’re giving them. No matter how good you are at hiring, some of your hires
won’t work out. Know how the people you’re considering operate and visualize
how that will produce successful results. Knowing what they did is valuable only
insofar as it helps you figure out what they are like.
f. Make sure your people have character and are capable. The person who is capable
but doesn’t have good character is generally destructive, because he or she has
the cleverness to do you harm and will certainly erode the culture. In my
opinion, most organizations overvalue the abilities piece and undervalue the
character piece because of a shortsighted focus on getting the job done. In doing
so, they lose the power of the great relationships that will take them through both
good and bad times.
Don’t get me wrong, I’m not saying that you should compromise capabilities
for character. The person with good character and poor abilities also creates
problems. While likable, he or she won’t get the job done and is painfully
difficult to fire because doing so feels like shooting the loyal dog you can’t
afford to keep anymore—but he must go. Ultimately, what you need in the
people you work with are excellent character and excellent capabilities, which is
why it’s so hard to find great people.
8.5 Don’t hire people just to fit the first job they will
do; hire people you want to share your life with.
Turnover is costly and inefficient because of the time it takes for people to get to
know each other and the organization. Both the people you work with and the
company itself will evolve in ways you can’t anticipate. So hire the kind of
people you want to share a long-term mission with. You will always have uses
for great people.
a. Look for people who have lots of great questions. Smart people are the ones who
ask the most thoughtful questions, as opposed to thinking they have all the
answers. Great questions are a much better indicator of future success than great
answers.
b. Show candidates your warts. Show your job prospects the real picture, especially
the bad stuff. Also show them the principles in action, including the most
difficult aspects. That way you will stress-test their willingness to endure the real
challenges.
c. Play jazz with people with whom you are compatible but who will also challenge you.
You need people who share your tastes and style but who can also push and
challenge each other. The best teams, whether in music, in sports, or in business,
do all those things at the same time.
8.6 When considering compensation, provide both
stability and opportunity.
Pay people enough so that they’re not under financial stress, but not so much
that they become fat and happy. You want your people to be motivated to
perform so they can realize their dreams. You don’t want people to accept a job
for the security of making a lot more money—you want them to come for the
opportunity to earn it through hard and creative work.
a. Pay for the person, not the job. Look at what people in comparable jobs with
comparable experience and credentials make, add some small premium over
that, and build in bonuses or other incentives so they will be motivated to knock
the cover off the ball. Never pay based on the job title alone.
b. Have performance metrics tied at least loosely to compensation.While you will never
fully capture all the aspects that make for a great work relationship in metrics,
you should be able to establish many of them. Tying performance metrics to
compensation will help crystallize your understanding of your deal with people,
provide good ongoing feedback, and influence how the person behaves on an
ongoing basis.
c. Pay north of fair. By being generous or at least a little north of fair with others I
have enhanced both our work and our relationships and most people have
responded in kind. As a result, we have gained something even more special
than money in the form of mutual caring, respect, and commitment.
d. Focus more on making the pie bigger than on exactly how to slice it so that you or
anyone else gets the biggest piece. The best negotiations are the ones with someone
in which I say, “You should take more,” and they argue back, “No you should
take more!” People who operate this way with each other make the relationship
better and the pie bigger—and both benefit in the long run.
8.7 Remember that in great partnerships,
consideration and generosity are more important
than money.
Someone who doesn’t have much can be more generous giving a little than a
rich person giving a lot. Some people respond to the generosity while others
respond to the money. You want the first type with you, and you always want to
treat them generously.
When I had nothing, I was as generous as I could be with people who
appreciated my generosity more than the higher levels of compensation others
could afford to give them. For that reason, they stayed with me. I never forgot
that, and I made a point of making them rich when I had the opportunity to do
so. And they in turn were generous to me in their own way when I needed their
generosity most. We both got something much more valuable than money—and
we got the money too.
Remember that the only purpose of money is to get you what you want, so
think hard about what you value and put it above money. How much would you
sell a good relationship for? There’s not enough money in the world to get you
to part with a valued relationship.
a. Be generous and expect generosity from others. If you’re not generous with others
and others aren’t generous with you, you won’t have a quality relationship.
8.8 Great people are hard to find so make sure you
think about how to keep them.
Make sure you’re following the suggestions made earlier, like building
meaningful relationships and constantly getting in sync. Most importantly, you
have to encourage people to speak up about how things are going for them.
Ensuring that their personal development is proceeding appropriately is
important too. Close advice from an active mentor should last at least one year.
When you know
what someone is like, you
know what you can expect
from them.
9 Constantly Train, Test, Evaluate, and
Sort People
Both your people and your design must evolve for your machine to improve.
When you get personal evolution right, the returns are exponential. As people
get better and better, they are more able to think independently, probe, and help
you refine your machine. The faster they evolve, the faster your outcomes will
improve.
Your part in an employee’s personal evolution begins with a frank assessment
of their strengths and weaknesses, followed by a plan for how their weaknesses
can be mitigated either through training or by switching to a different job that
taps into their strengths and preferences. At Bridgewater, new employees are
often taken aback by how frank and direct such conversations can be, but it’s not
personal or hierarchical—no one is exempt from this kind of criticism. While
this process is generally difficult for both managers and their subordinates, in the
long run it has made people happier and Bridgewater more successful.
Remember that most people are happiest when they are improving and doing the
things that suit them naturally and help them advance. So learning about your
people’s weaknesses is just as valuable (for them and for you) as is learning their
strengths.
Even as you help people develop, you must constantly assess whether they
are able to fulfill their responsibilities excellently. This is not easy to do
objectively since you will often have meaningful relationships with your reports
and may be reluctant to evaluate them accurately if their performance isn’t at the
bar. By the same token, you may be tempted to give an employee who rubs you
the wrong way a worse evaluation than he or she deserves. An idea meritocracy
requires objectivity. Many of the management tools we have developed were
built to do just that, providing us with an unbiased picture of people and their
performance independent of the biases of any one manager. This data is essential
in cases where a manager and a report are out of sync on an assessment and
others are called in to resolve the dispute.
A few years ago, one of our employees was serving in a trial role as a
department head. The prior department head had left the firm, and Greg, who
was then CEO, was assessing whether this employee, who had previously been a
deputy, had the right abilities to step into the role. The employee thought he did;
Greg and others thought he did not. But this decision was not as simple as the
CEO “making the call.” We want decisions to be more evidence-based. As a
result of our Dot Collector system of constant feedback, we had literally
hundreds of data points on the specific attributes required for the job, including
synthesis, knowing what he didn’t know, and managing at the right level. So we
put all this data onto the screen and stared hard at it together. We then asked the
employee to look at that body of evidence and reflect on what he would do if he
were in the position of deciding whether he’d hire himself for the job. Once he
was able to step back and look at the objective evidence, he agreed to move on
and try another role at Bridgewater more suited to his strengths.
Helping people acquire skills is easy—it’s typically a matter of providing
them with appropriate training. Improvements in abilities are more difficult but
essential to expanding what a person can be responsible for over time. And
changing someone’s values is something you should never count on. In every
relationship, there comes a point when you must decide whether you are meant
for each other—that’s common in private life and at any organization that holds
high standards. At Bridgewater, we know that we cannot compromise on the
fundamentals of our culture, so if a person can’t get to the bar in an acceptable
time frame, he or she must leave.
Every leader must decide between 1) getting rid of liked but incapable people
to achieve their goals and 2) keeping the nice but incapable people and not
achieving their goals. Whether or not you can make these hard decisions is the
strongest determinant of your own success or failure. In a culture like
Bridgewater’s, you have no choice. You must choose excellence, even though it
might be difficult at the moment, because it’s best for everyone.
9.1 Understand that you and the people you manage
will go through a process of personal evolution.
No one is exempt from this process. Having it go well depends on people’s
abilities to make frank assessments of strengths and weaknesses (most
importantly weaknesses). While it’s generally as difficult for managers to give
this feedback as it is for their subordinates to hear it, in the long run it makes
people happier and the organization more successful.
a. Recognize that personal evolution should be relatively rapid and a natural consequence
of discovering one’s strengths and weaknesses; as a result, career paths are not planned
at the outset. The evolutionary process is about discovering people’s likes and
dislikes as well as their strengths and weaknesses; it occurs when people are put
into jobs they are likely to succeed at, but in which they have to stretch
themselves. Each person’s career will evolve based on what we all learn about
what the person is like.
They should be given enough freedom to learn and think for themselves while
being coached so they are prevented from making unacceptable mistakes. The
feedback they receive should help them reflect on whether their problems are the
kind that can be resolved by additional learning or stem from natural abilities
that are unlikely to change. Typically it takes from six to twelve months to get to
know a new employee in a by-and-large sort of way, and about eighteen months
for them to internalize and adapt to the culture. During this time there should be
periodic mini-reviews and several major ones. Following each of these
assessments, new assignments should be made that are tailored to their likes and
dislikes and strengths and weaknesses. This is an iterative process, in which the
accumulated experiences of training, testing, and adjusting direct the person to
ever more suitable roles and responsibilities. At Bridgewater, it is typically both
a challenging and rewarding process that benefits the individual by providing
better self-understanding and greater familiarity with various jobs. When it
results in a parting of ways, it’s usually because people find they cannot be
excellent and happy in any job at the firm.
b. Understand that training guides the process of personal evolution.Trainees must be
open-minded; the process requires them to suspend their egos while they
discover what they are doing well and what they are doing poorly and decide
what to do about it. The trainer must be open-minded as well, and it’s best if at
least two believable trainers work with each trainee in order to triangulate their
views about what the trainee is like. This training is an apprentice relationship; it
occurs as the trainer and trainee share experiences, much like when a ski
instructor skis alongside his student. The process promotes growth,
development, and transparency around where people stand, why they stand
where they stand, and what they can do about improving it. It hastens not just
their own personal evolution but the evolution of the organization.
c. Teach your people to fish rather than give them fish, even if that means letting them
make some mistakes. Sometimes you need to stand by and let someone make a
mistake (provided it’s not too serious) so they can learn. It’s a bad sign if you are
constantly telling people what they should do; micromanagement typically
reflects inability on the part of the person being managed. It’s also not a good
thing for you as a manager. Instead of micromanaging, you should be training
and testing. Give people your thoughts on how they might approach their
decisions, but don’t dictate to them. The most useful thing you can do is to get in
sync with them, exploring how they are doing things and why.
d. Recognize that experience creates internalized learning that book learning can’t
replace. There are huge differences between memory-based book learning and
hands-on, internalized learning. A medical student who has learned to perform
an operation in a medical school class has not learned it in the same way as a
doctor who has already conducted several operations. People who excel at book
learning tend to call up from memory what they have learned in order to follow
stored instructions. People who have internalized their learning use the thoughts
flowing from their subconscious without thinking, in the same way they walk
down the street. Understanding these differences is essential.
9.2 Provide constant feedback.
Most training comes from doing and getting in sync about performance.
Feedback should reflect what is succeeding and what is not in proportion to the
actual situation, rather than in an attempt to balance compliments and criticisms.
Remember that you are responsible for achieving your goals, and you want your
machine to function as intended. For it to do so, the employees you supervise
must meet expectations, and only you can help them understand whether they
are stacking up. As their strengths and weaknesses become clearer,
responsibilities can be more appropriately tailored to make the machine work
better and to facilitate personal evolution.
9.3 Evaluate accurately, not kindly.
Nobody ever said radical honesty was easy. Sometimes, especially with new
employees who have not yet gotten used to it, an honest assessment feels like an
attack. Rise to a higher level and keep your eye on the bigger picture and counsel
the person you are evaluating to do the same.
a. In the end, accuracy and kindness are the same thing. What might seem kind but
isn’t accurate is harmful to the person and often to others in the organization as
well.
b. Put your compliments and criticisms in perspective. It helps to clarify whether the
weakness or mistake under discussion is indicative of a trainee’s total evaluation.
One day I told one of our new research people what a good job I thought he was
doing and how strong his thinking was. It was a very positive initial evaluation.
A few days later I heard him chatting away at length about stuff that wasn’t
related to work, so I warned him about the cost to his and our development if he
regularly wasted time. Afterward I learned that he thought he was on the brink of
being fired. My comment about his need for focus had nothing to do with my
overall evaluation. Had I explained myself better when we sat down that second
time, he could have put my comment into perspective.
c. Think about accuracy, not implications. It’s often the case that someone receiving
critical feedback gets preoccupied with the implications of that feedback instead
of whether it’s true. This is a mistake. As I’ll explain later, conflating the “what
is” with the “what to do about it” typically leads to bad decision making. Help
others through this by giving feedback in a way that makes it clear that you’re
just trying to understand what’s true. Figuring out what to do about it is a
separate discussion.
d. Make accurate assessments. People are your most important resource and truth is
the foundation of excellence, so make your personnel evaluations as precise and
accurate as possible. This takes time and considerable back-and-forth. Your
assessment of how Responsible Parties are performing should be based not on
whether they’re doing it your way but on whether they’re doing it in a good way.
Speak frankly, listen with an open mind, consider the views of other believable
and honest people, and try to get in sync about what’s going on with the person
and why. Remember not to be overconfident in your assessments, as it’s possible
you are wrong.
e. Learn from success as well as from failure. Radical truth doesn’t require you to be
negative all the time. Point out examples of jobs done well and the causes of
their success. This reinforces the actions that led to the results and creates role
models for those who are learning.
f. Know that most everyone thinks that what they did, and what they are doing, is much
more important than it really is. If you ask everybody in an organization what
percentage of the organization’s success they’re personally responsible for,
you’ll wind up with a total of about 300 percent.39 That’s just the reality, and it
shows why you must be precise in attributing specific results to specific people’s
actions. Otherwise, you’ll never know who is responsible for what—and even
worse, you may make the mistake of believing people who wrongly claim to be
behind great accomplishments.
9.4 Recognize that tough love is both the hardest and
the most important type of love to give (because it
is so rarely welcomed).
The greatest gift you can give someone is the power to be successful. Giving
people the opportunity to struggle rather than giving them the things they are
struggling for will make them stronger.
Compliments are easy to give but they don’t help people stretch. Pointing out
someone’s mistakes and weaknesses (so they learn what they need to deal with)
is harder and less appreciated, but much more valuable in the long run. Though
new employees will come to appreciate what you are doing, it is typically
difficult for them to understand it at first; to be effective, you must clearly and
repeatedly explain the logic and the caring behind it.
a. Recognize that while most people prefer compliments, accurate criticism is more
valuable. You’ve heard the expression “no pain no gain.” Psychologists have
shown that the most powerful personal transformations come from experiencing
the pain from mistakes that a person never wants to have again—known as
“hitting bottom.” So don’t be hesitant to give people those experiences or have
them yourself.
While it is important to be clear to people about what they are doing well, it is
even more important to point out their weaknesses and have them reflect on
them.
Problems require more time than things that are going well. They must be
identified and understood and addressed, while things that are running smoothly
require less attention. Instead of celebrating how great we are, we focus on
where we need to improve, which is how we got to be so great.
9.5 Don’t hide your observations about people.
Explore them openly with the goal of figuring out how you and your people are
built so that the right people can be put in the right jobs.
a. Build your synthesis from the specifics up. By synthesizing, I mean converting a
lot of data into an accurate picture. Too many people make assessments of
people without connecting them to specific data. When you have all the specifics
that we have at Bridgewater—the dots, meeting tapes, etc.—you can and must
work from the specifics up and see the patterns in the data. Even without such
tools, other data such as metrics, testing, and the input of others can help you
form a more complete picture of what the person is like, as well as examine what
they did.
b. Squeeze the dots. Every observation of a person potentially tells you something
valuable about how they operate. As I explained earlier, I call these observations
“dots.” A dot is a piece of data that’s paired with your inference about what it
means—a judgment about what someone might have decided, said, or thought.
Most of the time we make these inferences and judgments implicitly and keep
them to ourselves, but I believe that if they are collected systematically and put
into perspective over time, they can be extremely valuable when it’s time to step
back and synthesize the picture of a person.
c. Don’t oversqueeze a dot. Remember: A dot is just a dot; what matters is how they
add up. Think of each individual dot as an at-bat in baseball. Even great hitters
are going to strike out many times, and it would be foolish to evaluate them
based on one trip to the plate. That’s why stats like on-base percentage and
batting average exist.
In other words, any one event has many different possible explanations,
whereas a pattern of behavior can tell you a lot about root causes. The number of
observations needed to detect a pattern largely depends on how well you get in
sync after each observation. A quality discussion of how and why a person
behaved a certain way should help you understand the larger picture.
d. Use evaluation tools such as performance surveys, metrics, and formal reviews to
document all aspects of a person’s performance.It’s hard to have an objective, openminded, emotion-free conversation about performance if there is no data to
discuss. It’s also hard to track progress. This is part of the reason I created the
Dot Collector. I also recommend thinking about other ways that people’s
responsibilities can be put in metrics. One example: You can have people note
whether they did or didn’t do things on checklists, which you can then use to
calculate what percentage of tasks they complete. Metrics tell us whether things
are going according to plan—they are an objective means of assessment and they
improve people’s productivity.
9.6 Make the process of learning what someone is like
open, evolutionary, and iterative.
Articulate your assessment of a person’s values, abilities, and skills up front and
share it; listen to their and others’ responses to your description; organize a plan
for training and testing; and reassess your conclusions based on the performance
you observe. Do this on an ongoing basis. After several months of discussions
and real-world tests, you and your report should both have a pretty good idea of
what he or she is like. Over time this exercise will crystallize suitable roles and
appropriate training or it will reveal that it’s time for the person to find a more
appropriate job somewhere else.
a. Make your metrics clear and impartial. To help you build your perpetual motion
machine, have a clear set of rules and a clear set of metrics to track how people
are performing against those rules—and predetermined consequences that are
determined formulaically based on the output of those metrics.
The more clear-cut the rules are, the less arguing there will be about whether
someone did something wrong. For example, we have rules about how
employees can manage their own investments in a way that doesn’t conflict with
how we manage money for clients. Because these rules are clear-cut, there’s no
room for argument when a breach occurs.
Having metrics that allow everyone to see everyone else’s track record will
make evaluation more objective and fair. People will do the things that will get
them higher grades and will argue less about them. Of course, since most people
have a number of things to do that are of different importance, different metrics
have to be used and weighted appropriately. The more data you collect, the more
immediate and precise the feedback will be. That is one of the reasons I created
the Dot Collector tool to work as it does (providing lots of immediate feedback);
people often use the feedback that they get during a meeting to course-correct in
the meeting in real time.
Once you have your metrics, you can tie them to an algorithm that spits out
consequences. They can be as simple as saying that for every time you do X you
will earn Y amount of money (or bonus points), or it can be more complex (for
example, tying the weighted mix of metrics grades to various algorithms that
provide the estimated compensation or bonus points).
While this process will never be exact, it will still be good in even its crudest
form, and over time it will evolve to be terrific. Even when flawed, the formulaic
output can be used with discretion to provide a more precise evaluation and
compensation; over time it will evolve into a wonderful machine that will do
much of your managing better than you could do it on your own.
b. Encourage people to be objectively reflective about their performance. Being able to
see yourself from a higher level is essential for personal evolution and achieving
your goals. So you and the people who report to you should be looking at the
evidence of their performance together; for this to go well, you need lots and lots
of evidence and an objective point of view. If required, use agreed-upon others
to triangulate the picture the evidence presents.
c. Look at the whole picture. In reviewing someone, the goal is to see the patterns
and to understand the whole picture. No one can be successful in every way (if
they are extremely meticulous, for example, they might not be able to be fast,
and vice versa). Assessments made in reviews must be concrete; they’re not
about what people should be like but what they are like.
d. For performance reviews, start from specific cases, look for patterns, and get in sync
with the person being reviewed by looking at the evidence together. While feedback
should be constant, reviews are typically periodic; their purpose is to bring
together the accumulated evidence of what a person is like as it pertains to their
job performance. If the constant feedback is done well, it will become like a
constant review as the bits and pieces will add up to the whole. A review should
contain few surprises, because you should continuously be striving to make
sense of how the person is doing their job. If you think their job is being done
badly, you should have been probing to identify and address the root causes of
their underperformance on a case-by-case basis. It’s difficult for people to
identify their own weaknesses; they need the appropriate probing (not nitpicking) of specific cases by others to get at the truth of what they are like and
how they are fitting into their jobs.
In some cases it won’t take long to see what a person is like; in other cases
it’s a lot harder. But over time and with a large enough sample of cases, their
track records (the level and the steepness up or down in the trajectories that they
are responsible for, rather than the occasional wiggles) should paint a clear
picture of what you can expect from them. If there are performance issues, it is
either because of design problems (perhaps the person has too many
responsibilities) or fit/abilities problems. If the problems are due to the person’s
inabilities, these inabilities are either because of the person’s innate weaknesses
in doing that job (e.g., someone who’s five foot two probably shouldn’t be a
center on the basketball team) or because of inadequate training. A good review,
and getting in sync throughout the year, should get at these things. Make sure to
make your assessment relative to the absolute bar, not just the progress over
time. What matters most is not just outcomes but how responsibilities were
handled. The goal of a review is to be clear about what the person can and can’t
be trusted to do based on what they are like. From there, you can determine what
to do about it.
e. Remember that when it comes to assessing people, the two biggest mistakes you can
make are being overconfident in your assessment and failing to get in sync on it. If you
believe that something is true about someone, it’s your responsibility to make
sure that it is true and that the person you’re assessing agrees. Of course, in some
cases it may be impossible to get in sync (if you believe that someone was
dishonest and they insist that they weren’t, for example), but in a culture of truth
and transparency it is an obligation to share your view and let others express
theirs.
f. Get in sync on assessments in a nonhierarchical way. In most organizations,
evaluations run in only one direction, with the manager assessing the managee.
The managee typically disagrees with the assessment, especially if it is worse
than his or her self-assessment, because most people believe themselves to be
better than they really are. Managees also have opinions about managers that
they wouldn’t dare bring up in most companies, so misunderstandings and
resentments fester. This perverse behavior undermines the effectiveness of the
environment and the relationships between people. It can be avoided by getting
in sync in a high-quality way.
Your reports have to believe that you’re not their enemy—that your sole goal
is to move toward the truth; that you are trying to help them and so will not
enable their self-deception, perpetuate a lie, or let them off the hook. This has to
be done in an honest and transparent way, because if someone believes they are
being pigeonholed unfairly the process won’t work. As equal partners, it is up to
both of you to get to the truth. When each party is an equal participant, no one
can feel cornered.
g. Learn about your people and have them learn about you through frank conversations
about mistakes and their root causes. You need to be clear in conveying your
assessments to your reports and open-minded in listening to their replies so you
can work on setting their training and career paths together. Recognizing and
communicating people’s weaknesses is one of the most difficult things managers
have to do. It’s important for the party receiving feedback to be sympathetic to
the person trying to give it, because it’s not easy—it takes character on the part
of both participants to get to the truth.
h. Understand that making sure people are doing a good job doesn’t require watching
everything that everybody is doing at all times. You just have to know what they are
like and get a sampling. Regular sampling of a statistically reliable number of
cases will show you what a person is like and what you can expect from them.
Select which of their actions are critical enough to need preapproval and which
can be examined later. But be sure to do the audit, because people will tend to
give themselves too much slack or could cheat when they see that they’re not
being checked.
i. Recognize that change is difficult. Anything that requires change can be difficult.
Yet in order to learn and grow and make progress, you must change. When
facing a change, ask yourself: Am I being open-minded? Or am I being
resistant? Confront your difficulties head-on, force yourself to explore where
they come from, and you’ll find that you’ll learn a lot.
j. Help people through the pain that comes with exploring their weaknesses. Emotions
tend to heat up during most disagreements, especially when the subject is
someone’s weaknesses. Speak in a calm, slow, and analytical manner to
facilitate communication. Put things in perspective by reminding them that their
pain is the pain that comes with learning and personal evolution—and that
knowing the truth will put them on the path to a much better place. Consider
asking them to go away and reflect when they are calm, and have a follow-up
conversation a few days later.
Ultimately, to help people succeed you have to do two things: First let them
see their failures so clearly that they are motivated to change them, and then
show them how to either change what they are doing or rely on others who are
strong where they are weak. While doing the first without the second can be
demoralizing to the people you are trying to help, doing them both should be
invigorating, especially when they start experiencing the benefits.
9.7 Knowing how people operate and being able to
judge whether that way of operating will lead to
good results is more important than knowing what
they did.
Knowing what people are like is the best indicator of how well they are likely to
handle their responsibilities in the future. At Bridgewater, we call this “paying
more attention to the swing than the shot.” Since good and bad outcomes can
arise from circumstances that might not have had anything to do with how the
individual handled the situation, it is preferable to assess people based on both
their reasoning and their outcomes. I probe their thinking in a very frank way so
as not to let them off the hook. Doing this has taught me a lot about how to
assess others’ logic, and how to have better logic myself. When both the
outcomes and the thinking behind them are bad, and when this happens a
number of times, I know I don’t want them to do that type of thinking anymore.
For example, if you’re a poker player and you play a lot of poker, you will
win some hands and lose others and on any given night you might walk away
with less money than a lesser player who’s gotten lucky. It would be a mistake to
judge the quality of a player based on just one outcome. Instead, look at how
well someone does what they do and the outcomes they produce over time.
a. If someone is doing their job poorly, consider whether it is due to inadequate learning
or inadequate ability. Think of people’s performance as being made up of two
things: learning and ability, as shown on page 437. A weakness that is due to a
lack of experience or training can be fixed, while a weakness that is due to a lack
of ability can’t be. Failing to distinguish between these causes is a common
mistake among managers, because managers are often reluctant to appear unkind
or judgmental. Also, they know that people assessed this way tend to push back.
This is another one of those situations in which you must force yourself to be
practical and realistic.
b. Training and testing a poor performer to see if he or she can acquire the required skills
without simultaneously trying to assess their abilities is a common mistake. Skills are
readily testable, so they should be easy to determine. Abilities, especially rightbrained abilities, are more difficult to assess. When thinking about why someone
is a poor performer, openly consider whether it is a problem with their abilities.
9.8 Recognize that when you are really in sync with
someone about their weaknesses, the weaknesses
are probably true.
When you reach an agreement, it’s a good sign you’ve arrived at truth, which is
why getting to that point is such a great achievement. This is one of the main
reasons that the person being evaluated must be an equal participant in the
process. When you do agree, make a formal record of it. This information will
be a critical building block for future success.
a. When judging people, remember that you don’t have to get to the point of “beyond a
shadow of a doubt.” Perfect understanding isn’t possible; trying to get to it wastes
time and stalls progress. Instead, work toward developing a mutually agreedupon, by-and-large understanding of what someone is like that has a high level
of confidence behind it. When necessary, take the time to enrich this
understanding.
b. It should take you no more than a year to learn what a person is like and whether they
are a click for their job. You should be able to roughly assess someone’s abilities
after six to twelve months of close contact, numerous tests, and getting in sync.
A more confident assessment will probably take about eighteen months. This
timeline will of course depend on the job, the person, the amount of contact with
them, and how well you get in sync.
c. Continue assessing people throughout their tenure. As you get to know your people
better, you will be better able to train and direct them. Most importantly, you
will be able to assess their core values and abilities more accurately and make
sure they complement yours. Don’t rest with your initial evaluation, however.
Always ask yourself if you would have hired them for that job knowing what
you know now. If not, get them out of the job.
d. Evaluate employees with the same rigor as you evaluate job candidates. I find it
puzzling that interviewers freely and confidently criticize job candidates without
knowing them well but won’t criticize employees for similar weaknesses even
though they have more evidence. That is because they view criticism as harmful
and feel more protective of a fellow employee than they do of an outsider. If you
believe that truth is best for everyone, then you should see why this is a mistake,
and why frank and ongoing evaluations are so important.
9.9 Train, guardrail, or remove people; don’t
rehabilitate them.
Training is part of a plan to develop people’s skills and help them evolve.
Rehabilitation is an attempt to create significant changes in people’s values
and/or abilities. Since values and abilities are difficult to change, rehabilitation is
typically impractical. Since people with inappropriate values and inadequate
abilities can have a devastating impact on the organization, they should be fired.
If rehabilitation is attempted, it is generally best directed by professionals over
extended periods of time.
Remember that if you are expecting people to be much better in the near
future than they have been in the past, you are probably making a serious
mistake. People who repeatedly operate in a certain way will probably continue
to operate that way because that behavior reflects what they’re like. Since people
generally change slowly, you should expect slow improvement (at best). Instead,
you need to change the people or change the design. Since changing the design
to accommodate people’s weaknesses is generally a bad idea, it is better to sort
the people. Sometimes good people “lose their boxes” (they get fired from their
role) because they can’t evolve into Responsible Parties soon enough. Some of
them might be good in another position, in which case they should be reassigned
within the company; some of them will not and should leave.
a. Don’t collect people. It is much worse to keep someone in a job unsuitable for
them than it is to fire or reassign them. Consider the enormous costs of not firing
someone unsuited for a job: the costs of bad performance; the time and effort
wasted trying to train them; and the greater pain of firing someone who’s been
around awhile (say, five years or more) compared with letting someone go after
just a year. Keeping people in jobs they are not suited for is terrible for them
because it allows them to live in a false reality while holding back their personal
evolution, and it is terrible for the community because it compromises the
meritocracy and everyone pays the price. Don’t let yourself be held hostage to
anyone; there is always someone else. Never compromise your standards or let
yourself be squeezed.
b. Be willing to “shoot the people you love.” It is very difficult to fire people you care
about. Cutting someone that you have a meaningful relationship with but who
isn’t an A player in their job is difficult because ending good relationships is
hard, but it is necessary for the long-term excellence of the company. You may
have a need for the work they’re doing (even if it’s not excellent) and find it hard
to make a change. But they will pollute the environment and fail you when you
really need them.
Doing this is one of those difficult, necessary things. The best way to do it is
to “love the people you shoot”—do it with consideration and in a way that helps
them.
c. When someone is “without a box,” consider whether there is an open box that would be
a better fit or whether you need to get them out of the company. Recognize that if they
failed in that job, it is because of some qualities they have. You will need to
understand what those qualities are and make sure they don’t apply to any new
role. Also, if you learn that they don’t have the potential to move up, don’t let
them occupy the seat of someone who can.
Remember that you’re trying to select people with whom you want to share
your life. Everyone evolves over time. Because managers develop a better idea
of a new hire’s strengths and weaknesses and their fit within the culture than
what emerges from the interview process, they are well positioned to assess
them for another role if the one they were hired for doesn’t work out.
Whenever someone fails at a job, it’s critical to understand why they failed
and why those reasons won’t pose the same problems in a new job.
d. Be cautious about allowing people to step back to another role after failing. Note I
said “be cautious.” I didn’t say never, because it depends on the circumstances.
On the one hand, you want people to stretch themselves and experiment with
new jobs. You don’t want to get rid of a great person just because he or she tried
something new and failed. But on the other hand, if you look at most people in
this situation, by and large you’ll regret allowing them to step back.
There are three reasons for this: 1) You’re giving up a seat for someone else
who might be able to advance, and people who can advance are better to have
than people who can’t; 2) The person stepping back could continue to want to do
what they aren’t capable of doing, so there’s a real risk of them job slipping into
work they’re not a fit for; 3) The person may experience a sense of confinement
and resentment being back in a job that they probably can’t advance beyond.
Keeping them is generally viewed as the preferable short-run decision but in the
long run it’s probably the wrong thing to do. This is a hard decision. You need to
understand deeply what the person in this situation is like and weigh the costs
carefully before deciding.
9.10 Remember that the goal of a transfer is the best,
highest use of the person in a way that benefits
the community as a whole.
Both affected managers should be in sync that the new role is the best, highest
use or escalate up the chain to make a determination. The manager wanting to
recruit the person is responsible for not causing a disruption. An informal
conversation to see if someone is interested is fine, but there should be no active
recruiting prior to getting in sync with the existing manager. The timing of the
move should be decided by the existing manager in consultation with relevant
parties.
a. Have people “complete their swings” before moving on to new roles. There should
always be follow-through, not interruption, unless a pressing reason exists
(when, say, a person would be a great click for another job that needs to be filled
immediately). In a company where things are evolving quickly and people are
expected to speak openly, it is natural that there will be a steady stream of
opportunities for employees to move into new roles. But if too many people
jump from one job to another without fulfilling their responsibilities, the
resulting discontinuity, disorder, and instability will be bad for managers, bad for
the culture, and bad for the people moving, because they won’t be adequately
tested in their ability to move things to completion. As a guideline, a year in a
job is sufficient before having conversations about a new role, although this isn’t
black and white—the range could easily vary depending on the circumstances.
9.11 Don’t lower the bar.
You reach a point in all relationships when you must decide whether you are
meant for each other—that’s common in private life and at any organization that
holds very high standards. At Bridgewater, we know that we cannot compromise
on the fundamentals of our culture, so if a person cannot operate within our
requirements of excellence through radical truth and transparency in an
acceptable time frame, he or she must leave.
Tough love is both the hardest
and the most important type of
love to give.
TO BUILD AND EVOLVE YOUR
MACHINE . . .
Most people get caught up in the blizzard of things coming at them. In contrast,
successful people get above the blizzard so they can see the causes and effects at
play. This higher-level perspective allows them to see themselves and others
objectively as a machine, to understand who can and cannot do what well, and
how everyone can fit together in a way that will produce the best outcomes.
Now that you’ve learned the best ways to approach your machine’s two key
components—its culture and its people—I’d like to turn to principles for
managing and improving your machine.
In the next chapter, I will go over my high-level principles for applying
higher-level thinking to conceptualize your organization as a machine. This isn’t
just a thought experiment; thinking in a machinelike way also has important
practical ramifications for how you manage your team and how you design roles,
responsibilities, and workflows.
In Chapter Ten, Manage as Someone Operating a Machine to Achieve a Goal,
I apply this approach to organizational design at its highest level.

Once you understand how to build and run your machine, your next objective
is to figure out how to improve it. We do this through the 5-Step Process I
described as 1) identifying our goals, 2) encountering our problems; 3)
diagnosing those problems to get at their root causes; 4) designing changes to get
around the problems; and 5) doing what is needed. Think of any organization
you know and you will see that they go through this evolutionary process with
varying degrees of success. The world is littered with once-great organizations
that deteriorated because the initial waves of excellence faded and the leadership
failed to adequately adapt by changing the people and the designs. There are also
a few organizations that keep reinventing themselves to go on to new heights of
greatness.
The subsequent chapters of this section explain how the 5-Step Process works
within an organization, and what you need to do to make sure you get the most
out of it. To be effective, you must look down upon your machines as would an
organizational engineer, comparing the outputs with the goals, and constantly
modifying the people and the designs to make the outputs better. Most
importantly, you must orchestrate your people. How well you do this will
determine your success.
Finally, you’ll read two chapters on making sure the idea meritocracy runs as
designed, both at the day-to-day and the strategic level. Chapter Fifteen, Use
Tools and Protocols to Shape How Work Is Done, describes the importance of
systemization and tools to ensure the idea meritocracy functions as intended.
And in Chapter Sixteen, And for Heaven’s Sake, Don’t Overlook Governance! I
explain that while, at first, I underestimated the importance of governance to
ensuring that an organization operates effectively over time, as I’ve transitioned
myself out of running Bridgewater day to day, I’ve learned a number of
important principles for how governance should function in an idea meritocracy.
39 We did this at Bridgewater and the figure came out to 301 percent.
10 Manage as Someone Operating a
Machine to Achieve a Goal
No matter what work you do, at a high level you are simply setting goals and
building machines to help you achieve them. I built the machine that is
Bridgewater by constantly comparing its actual outcomes to my mental map of
the outcomes that it should be producing, and finding ways to improve it.
I won’t say anything specific about how you should set your own
organization’s goals other than that the high-level principles about goal setting I
covered in Life Principles apply equally to individuals and organizations. I will,
however, point out that in running your organization, you and the people you
work with must be clear on how your lower-level goals—whether they’re to
produce things cost-effectively, achieve high customer satisfaction, help a
certain number of people in need, whatever—grow out of your higher-level
goals and values.
No matter how good you are at design, your machine will have problems.
You or some other capable mechanic needs to identify those problems and look
under the hood of the machine to diagnose their root causes. You or whoever is
diagnosing those problems has to understand what the parts of the machine—the
designs and the people—are like and how they work together to produce the
outcomes. The people are the most important part, since most everything,
including the designs themselves, comes from people. Unless you have a clear
understanding of your machine from a higher level—and can visualize all its
parts and how they work together—you will inevitably fail at this diagnosis and
fall short of your potential.
At Bridgewater, the high-level goal of all of our machines is to create
excellent outcomes for our clients—in the returns on their investments, of
course, but also in the quality of our relationship and our thought partnership in
understanding global economies and markets more broadly. Before we had
anything else at Bridgewater, we had this commitment to excellence.
Maintaining these extremely high standards has always been a challenge,
especially as the pace of our growth and change accelerated. In the next several
chapters, I will walk you through a case in which our client service outcomes
began to slip and show how we used the 5-Step Process to improve our machine.
But first, I want to share some high-level principles for building and evolving
the machine that is any organization.
10.1 Look down on your machine and yourself within it
from the higher level.
Higher-level thinking isn’t something that’s done by higher-level beings. It’s
simply seeing things from the top down. Think of it as looking at a photo of
yourself and the world around you from outer space. From that vantage, you can
see the relationships between the continents, countries, and seas. Then you can
get more granular, by zooming into a closer-up view of your country, your city,
your neighborhood, and finally your immediate environment. Having that macro
perspective gives you much more insight than you’d get if you simply looked
around your house through your own eyes.
a. Constantly compare your outcomes to your goals. You must always be
simultaneously trying to accomplish the goal and evaluating the machine (the
people and the design), as all outcomes are reflections of how the machine is
running. Whenever you identify a problem with your machine, you need to
diagnose whether it is the result of a flaw in its design or in the way your people
are handling their responsibilities.
Sample size is important. Any problem can be a one-off imperfection or a
symptom of root causes that will show up as problems repeatedly. If you look at
enough problems, which one it is will become clear.
b. Understand that a great manager is essentially an organizational engineer. Great
managers are not philosophers, entertainers, doers, or artists. They are engineers.
They see their organizations as machines and work assiduously to maintain and
improve them. They create process-flow diagrams to show how the machine
works and to evaluate its design. They build metrics to light up how well each of
the individual parts of the machine (most importantly, the people) and the
machine as a whole are working. And they tinker constantly with its designs and
its people to make both better.
They don’t do this randomly. They do it systematically, always keeping the
cause-and-effect relationships in mind. And while they care deeply about the
people involved, they cannot allow their feelings for them or their desire to spare
them discomfort to stand in the way of the machine’s constant improvement. To
do otherwise wouldn’t be good for either the individuals on the team or the team
that the individuals are a part of.
Of course, the higher up you are in an organization, the more important vision
and creativity become, but you still must have the skills required to
manage/orchestrate well. Some young entrepreneurs start with the vision and
creativity and then develop their management skills as they scale their
companies; others start with management skills and develop vision as they climb
the ladder. But like great musicians, all great managers have both creativity and
technical skills. And no manager at any level can expect to succeed without the
skill set of an organizational engineer.
c. Build great metrics. Metrics show how the machine is working by providing
numbers and setting off alert lights in a dashboard. Metrics are an objective
means of assessment and they tend to have a favorable impact on productivity. If
your metrics are good enough, you can gain such a complete and accurate view
of what your people are doing and how well they are doing it that you can almost
manage via the metrics alone.
In constructing your metrics, imagine the most important questions you need
answered in order to know how things are going and imagine what numbers will
give you the answers to them. Don’t look at the numbers that you have and try to
adapt them to your purposes, because you won’t get what you need. Instead start
with the most important questions and imagine the metrics that will answer
them.
Remember that any single metric can mislead; you need enough evidence to
establish patterns. And of course the information that goes into the metrics must
be assessed for accuracy. A reluctance to be critical can be detected by looking
at the average grade each grader gives; those giving higher average grades might
be easy graders and vice versa. Similarly helpful are “forced rankings,” in which
people must rank co-worker performance from best to worst. Forced rankings
are essentially the same thing as “grading on a curve.” Metrics that allow for
independent grading across departments and groups are especially valuable.
d. Beware of paying too much attention to what is coming at you and not enough
attention to your machine. If you keep your focus on each individual task, you will
inevitably get bogged down. If instead you pay attention to building and
managing your machines, you will be rewarded many times over.
e. Don’t get distracted by shiny objects. No matter how complete any project or plan,
there will always be things that come out of nowhere and look like the most
important or urgent or attractive thing to focus on. These shiny objects may be
traps that will distract you from thinking in a machinelike way, so be on your
guard for them and don’t let yourself be seduced.
10.2 Remember that for every case you deal with, your
approach should have two purposes . . .
. . . 1) to move you closer to your goal, and 2) to train and test your machine (i.e., your
people and your design). The second purpose is more important than the first
because it is how you build a solid organization that works well in all cases.
Most people focus more on the first purpose, which is a big mistake.
a. Everything is a case study. Think about what type of case it is and what
principles apply to that type of case. By doing this and helping others to do this
you’ll get better at handling situations as they repeat over and over again through
time.
b. When a problem occurs, conduct the discussion at two levels: 1) the machine level (why
that outcome was produced) and 2) the case-at-hand level (what to do about it). Don’t
make the mistake of just having the case-at-hand discussion, because then you
are micromanaging (i.e., you are doing your managee’s thinking and your
managee will mistakenly think that’s okay). When having the machine-level
discussion, think clearly how things should have gone and explore why they
didn’t go that way. If you are in a rush to determine what to do and you have to
tell the person who works for you what to do, make sure to explain what you are
doing and why.
c. When making rules, explain the principles behind them. You don’t want the people
you work with to merely pay lip service to your community’s rules; they should
have a high sense of ethics that makes them want to abide by them and hold
others accountable for abiding by them, while also working to perfect them. The
way to achieve this is via principles that are sound and that have been tested
through open discussion.
d. Your policies should be natural extensions of your principles. Principles are
hierarchical—some are overarching and some are less important—but they all
should inform the policies that guide your individual decisions. It pays to think
those policies through to ensure that they are consistent with each other and the
principles they are derived from.
When faced with a case that doesn’t have a clear policy to follow (for
example, what to do about an employee whose job is to travel but who faces
potential health risks because of his travel), one can’t just snatch an answer out
of the blue without regard for higher-level principles. Policymakers must make
policy in the same way that the judicial system creates case law—iteratively and
incrementally, by dealing with specific cases and interpreting the law as it
applies to them.
That is how I have tried to operate. When a case arises, I lay out the
principles behind how I am handling it and get in sync with others to see if we
agree on those principles or must modify them to make them better. By and
large, that’s how all Bridgewater’s principles and policies were developed.
e. While good principles and policies almost always provide good guidance, remember
that there are exceptions to every rule. While everyone has the right to make sense
of things—and is in fact obliged to challenge principles and policies if they
conflict with what they believe is the best approach—that’s not the same thing as
having the right to change them. Changes in policies must be approved by those
who made them (or someone else who has been made responsible for evolving
them).
When someone wishes to make an exception to an important policy at
Bridgewater, they must write up a proposed alternative policy and escalate their
request to the Management Committee.
Exceptions should be extremely rare because policies that have frequent
exceptions are ineffective. The Management Committee will formally consider it
and either reject it, amend it, or adopt it.
10.3 Understand the differences between managing,
micromanaging, and not managing.
Great managers orchestrate rather than do. Like the conductor of an orchestra,
they do not play an instrument, but direct their people so that they play
beautifully together. Micromanaging, in contrast, is telling the people who work
for you exactly what tasks to do or doing their tasks for them. Not managing is
having them do their jobs without your oversight and involvement. To be
successful, you need to understand these differences and manage at the right
level.
a. Managers must make sure that what they are responsible for works well. They can do
this by 1) managing others well (as explained above), 2) job slipping down to do
work they’re not responsible for because others can’t do their jobs well, or 3)
escalating what they can’t manage well. The first choice is optimal; the second
signals that a change is needed in the people and the design; the third choice is
harder still but mandatory.
b. Managing the people who report to you should feel like skiing together. Like a ski
instructor, you need to have close contact with your people on the slopes so that
you can assess their strengths and weaknesses as they are doing their jobs. There
should be a good back-and-forth as they learn by trial and error. With time you
will be able to decide what they can and can’t handle on their own.
c. An excellent skier is probably going to be a better ski coach than a novice skier.
Believability applies to management too. The better your track record, the more
value you can add as a coach.
d. You should be able to delegate the details. If you keep getting bogged down in
details, you either have a problem with managing or training, or you have the
wrong people doing the job. The real sign of a master manager is that he doesn’t
have to do practically anything. Managers should view the need to get involved
in the nitty-gritty as a bad sign.
At the same time, there’s danger in thinking you’re delegating details when
you’re actually being too distant from what’s important and essentially are not
managing. Great managers know the difference. They strive to hire, train, and
oversee in a way in which others can superbly handle as much as possible on
their own.
10.4 Know what your people are like and what makes
them tick, because your people are your most
important resource.
Develop a full profile of each person’s values, abilities, and skills. These
qualities are the real drivers of behavior, so knowing them in detail will tell you
which jobs a person can and cannot do well, which ones they should avoid, and
how the person should be trained. These profiles should change as the people
change.
If you don’t know your people well, you don’t know what you can expect
from them. You’re flying blind and you have no one to blame but yourself if you
don’t get the outcomes you’re expecting.
a. Regularly take the temperature of each person who is important to you and to the
organization. Probe your key people and urge them to bring up anything that
might be bothering them. These problems might be ones you are unaware of, or
they may be misunderstood by the person raising them. Whatever the case, it is
essential that they be brought out into the open.
b. Learn how much confidence to have in your people—don’t assume it. No manager
should delegate responsibilities to people they don’t know well. It takes time to
learn about people and how much confidence you can vest in them. Sometimes
new people are offended when their managers don’t have confidence in how
they are carrying out their responsibilities. They think it’s a criticism of their
abilities when it’s simply a matter of the manager being realistic about the fact
that he or she hasn’t had enough time or direct experience with them to form a
point of view.
c. Vary your involvement based on your confidence. Management largely consists of
scanning and probing everything you are responsible for to identify suspicious
signs. Based on what you see, you should vary your degree of digging, doing
more for people and areas that look suspicious, and less where what you see
instills confidence. At Bridgewater a host of tools (Issue Logs, metrics, daily
updates, checklists) produce objective performance-related data. Managers
should review and spot-check them regularly.
10.5 Clearly assign responsibilities.
Eliminate any confusion about expectations and ensure that people view their
failures to complete their tasks and achieve their goals as personal failures. The
most important person on a team is the one who is given the overall
responsibility for accomplishing the mission. This person must have both the
vision to see what should be done and the discipline to make sure it’s
accomplished.
a. Remember who has what responsibilities. While that might sound obvious, people
often fail to stick to their own responsibilities. Even senior people in
organizations sometimes act like young kids just learning to play soccer, running
after the ball in an effort to help but forgetting what position they are supposed
to play. This can undermine rather than improve performance. So make sure that
people remember how the team is supposed to work and play their positions
well.
b. Watch out for “job slip.” Job slip is when a job changes without being explicitly
thought through and agreed to, generally because of changing circumstances or a
temporary necessity. Job slip often leads to the wrong people handling the wrong
responsibilities and confusion over who is supposed to do what.
10.6 Probe deep and hard to learn what you can expect
from your machine.
Constantly probe the people who report to you while making sure they
understand that it’s good for them and everyone else to surface their problems
and mistakes. Doing so is required to make sure you’re getting what you want,
even from people who are doing their jobs well (though they can be given a bit
more leeway).
Probing shouldn’t just come from the top down. The people who work for
you should constantly challenge you, so that you can become as good as you can
be. In doing so, they will understand that they are just as responsible for finding
solutions as you are. It’s much easier for people to remain spectators than to
become players. Forcing them onto the field strengthens the whole team.
a. Get a threshold level of understanding. When managing an area, you need to gain
a rich enough understanding of the people, processes, and problems around you
to make well-informed decisions. Without that understanding, you will believe
the stories and excuses you are told.
b. Avoid staying too distant. You need to know your people extremely well,
provide and receive regular feedback, and have quality discussions. And while
you don’t want to get distracted by gossip, you have to be able to get a quick
download from the appropriate people. Your job design needs to build in the
time to do these things. If it doesn’t, you run the risk of not managing. The tools
I have developed give me windows into what people are doing and what they are
like, and I follow up on problems.
c. Use daily updates as a tool for staying on top of what your people are doing and
thinking. I ask each person who reports to me to take about ten to fifteen minutes
to write a brief description of what they did that day, the issues pertaining to
them, and their reflections. By reading these updates and triangulating them (i.e.,
seeing other people’s takes on what they are doing together), I can gauge how
they are working together, what their moods are, and which threads I should pull
on.
d. Probe so you know whether problems are likely to occur before they actually do. If
problems take you by surprise, it is probably because you are either too far
removed from your people and processes or you haven’t adequately visualized
how the people and processes might lead to various outcomes. When a crisis is
brewing, contact should be close enough that there will be no surprises.
e. Probe to the level below the people who report to you. You can’t understand how
the person who reports to you manages others unless you know their direct
reports and can observe how they behave.
f. Have the people who report to the people who report to you feel free to escalate their
problems to you. This is a great and useful form of upward accountability.
g. Don’t assume that people’s answers are correct. People’s answers could be
erroneous theories or spin, so you need to occasionally double-check them,
especially when they sound questionable. Some managers are reluctant to do
this, feeling it is the equivalent of saying they don’t trust their people. These
managers need to understand that this process is how trust is earned or lost. Your
people will learn to be much more accurate in what they tell you if they
understand this—and you will learn who you can rely on.
h. Train your ear. Over time, you’ll hear the same verbal cues indicating that
someone is thinking about something badly or failing to apply principles
appropriately. For example, listen for the anonymous “we” as a cue that
someone is likely depersonalizing a mistake.
i. Make your probing transparent rather than private. This helps assure the quality of
the probing (because others can make their own assessments), and it will
reinforce the culture of truth and transparency.
j. Welcome probing. It’s important to welcome probing of yourself because no one
can see themselves objectively. When you are being probed, it’s essential to stay
calm. Your emotional “lower-level you” will probably react to probing with
something like, “You’re a jerk because you’re against me and making me feel
bad,” whereas your thoughtful “higher-level you” should be thinking, “It’s
wonderful that we can be completely honest like this and have such a thoughtful
exchange to help assure that I’m doing things well.” Listen to your higher-level
you and don’t lose sight of how difficult it can be for the person doing the
probing. Besides helping to make the organization and your relationship with the
person who is probing you go well, working yourself through this difficult
probing will build your character and your equanimity.
k. Remember that people who see things and think one way often have difficulty
communicating with and relating to people who see things and think another way.
Imagine you had to describe what a rose smells like to someone who lacks a
sense of smell. No matter how accurate your explanation, it will always fall short
of the actual experience. The same thing is true of differences in ways of
thinking. They are like blind spots, and if you have one (which we all do), it can
be challenging to see what’s there. Working through these differences requires a
lot of patience and open-mindedness, as well as triangulating with other people
who can help fill in the picture.
l. Pull all suspicious threads. It’s worth pulling all suspicious threads because: 1)
Small negative situations can be symptomatic of serious underlying problems; 2)
Resolving small differences of perception may prevent more serious divergence
of views; and 3) In trying to create a culture that values excellence, constantly
reinforcing the need to point out and stare at problems—no matter how small—
is essential (otherwise you risk setting an example of tolerating mediocrity).
Prioritization can be a trap if it causes you to ignore the problems around you.
Allowing small problems to go unnoticed and unaddressed creates the perception
that it’s acceptable to tolerate such things. Imagine that all your little problems
are small pieces of trash you’re stepping over to get to the other side of a room.
Sure, what’s on the other side of the room may be very important, but it won’t
hurt you to pick up the trash as you come to it, and by reinforcing the culture of
excellence it will have positive second- and third-order consequences that will
reverberate across your whole organization. While you don’t need to pick up
every piece, you should never lose sight of the fact that you’re stepping over the
trash nor that it’s probably not as hard as you think to pick up a piece or two as
you go on your way.
m. Recognize that there are many ways to skin a cat. Your assessment of how
Responsible Parties are doing their jobs should not be based on whether they’re
doing it your way but whether they’re doing it in a good way. Be careful about
expecting a person who achieves success one way to do it a different way. That’s
like insisting that Babe Ruth improve his swing.
10.7 Think like an owner, and expect the people you
work with to do the same.
It’s a basic reality that if you don’t experience the consequences of your actions,
you’ll take less ownership of them. If you are an employee, and you get a
paycheck for turning up and pleasing your boss, your mind-set will inevitably be
trained to this cause-effect relationship. If you are a manager, make sure you
structure incentives and penalties that encourage people to take full ownership of
what they do and not just coast by. This includes straightforward things such as
spending money like it’s their own and making sure their responsibilities aren’t
neglected when they’re out of the office. When people recognize that their own
well-being is directly connected to that of their community, the ownership
relationship becomes reciprocal.
a. Going on vacation doesn’t mean one can neglect one’s responsibilities. Thinking like
an owner means making sure that your responsibilities are handled well
regardless of what comes up. While you are away on vacation, it’s your
responsibility to make sure nothing drops. You can do that via a combination of
good planning and coordination before you go and staying on top of things while
you are away. This needn’t take much time—it can be as little as an hour of
good checking from afar and it doesn’t even have to be every day, so you can
typically slip it in when it’s convenient.
b. Force yourself and the people who work for you to do difficult things. It’s a basic law
of nature: You must stretch yourself if you want to get strong. You and your
people must act with each other like trainers in gyms in order to keep each other
fit.
10.8 Recognize and deal with key-man risk.
Every key person should have at least one person who can replace him or her.
It’s best to have those people designated as likely successors and to have them
apprentice and help in doing those jobs.
10.9 Don’t treat everyone the same—treat them
appropriately.
It’s often said that it is neither fair nor appropriate to treat people differently. But
in order to treat people appropriately you must treat them differently. That is
because people and their circumstances are different. If you were a tailor you
wouldn’t give all of your customers the same size suit.
It is, however, important to treat people according to the same set of rules.
That’s why I’ve tried to flesh out Bridgewater’s principles in enough depth that
differences are accounted for. For example, if someone has worked at
Bridgewater for many years, that factors into how they are treated. Likewise,
while I find all dishonesty intolerable, I don’t treat all acts of dishonesty and all
people who are dishonest the same.
a. Don’t let yourself get squeezed. Plenty of people have threatened me over the
years by saying they’d quit, bring a lawsuit, embarrass me in the press—you
name it. While some people have advised me that it’s easier to just make such
things go away, I’ve found doing that is almost always shortsighted. Giving in
not only compromises your values, it telegraphs that the rules of the game have
changed and opens you up to more of the same. Fighting for what’s right can be
hard in the short term, of course. But I’m willing to take the punch. What I
worry about is doing the right thing and not about what people think about me.
b. Care about the people who work for you. If you aren’t working with people you
care about and respect, your job probably isn’t the one for you. I will be there for
anyone who really needs me; when a whole community operates this way, it is
very powerful and rewarding. Personal contact at times of personal difficulty is a
must.
10.10 Know that great leadership is generally not what
it’s made out to be.
I don’t use the word “leadership” to describe what I do or what I think is good
because I don’t believe that what most people think of as “good leadership” is
effective. Most people think a good leader is a strong person who engenders
confidence in others and motivates them to follow him/her, with the emphasis on
“follow.” The stereotypical leader often sees questioning and disagreement as
threatening and prefers people do what they’re told. As an extension of this
paradigm, the leader bears the main burden of decision making. But because
such leaders are never as all-knowing as they try to appear, disenchantment and
even anger tends to set in. That’s why people who once loved their charismatic
leaders often want to get rid of them.
This traditional relationship between “leaders” and “followers” is the opposite
of what I believe is needed to be most effective, and being maximally effective
is the most important thing a “leader” must do. It is more practical to be honest
about one’s uncertainties, mistakes, and weaknesses than to pretend they don’t
exist. It is also more important to have good challengers than good followers.
Thoughtful discussion and disagreement is practical because it stress-tests
leaders and brings what they are missing to their attention.
One thing that leaders should not do, in my opinion, is be manipulative.
Sometimes leaders will use emotions to motivate people to do things that they
would not do after reflecting clearly. When dealing with intelligent people in an
idea meritocracy, it is essential that one always appeal to their reason rather than
their base emotions.
The most effective leaders work to 1) open-mindedly seek out the best
answers and 2) bring others along as part of that discovery process. That is how
learning and getting in sync occurs. A truly great leader is appropriately
uncertain but well equipped to deal with that uncertainty through open-minded
exploration. All else being equal, I think the kind of leader who looks and acts
like a skilled ninja will beat the kind of leader who looks and acts like a
muscular action hero every time.
a. Be weak and strong at the same time. Sometimes asking questions to gain
perspective can be misperceived as being weak and indecisive. Of course it’s
not. It’s necessary in order to become wise and it is a prerequisite for being
strong and decisive.
Always seek the advice of wise others and let those who are better than you
take the lead. The objective is to have the best understanding to make the best
possible leadership decisions. Be open-minded and assertive at the same time
and get in tight sync with those who work with you, recognizing that sometimes
not all or even the majority of people will agree with you.
b. Don’t worry about whether or not your people like you and don’t look to them to tell
you what you should do. Just worry about making the best decisions possible,
recognizing that no matter what you do, most everyone will think you’re doing
something—or many things—wrong. It is human nature for people to want you
to believe their own opinions and to get angry at you if you don’t, even when
they have no reason to believe that their opinions are good. So, if you’re leading
well, you shouldn’t be surprised if people disagree with you. The important thing
is for you to be logical and objective in assessing your probabilities of being
right.
It is not illogical or arrogant to believe that you know better than the average
person, so long as you are appropriately open-minded. In fact, it is not logical to
believe that what the average person thinks is better than what you and the most
insightful people around you think, because you have earned your way into your
higher-than-average position and you and those insightful people are more
informed than the average person. If the opposite were true, then you and the
average man shouldn’t have your respective jobs. In other words, if you don’t
have better insights than them, you shouldn’t be a leader—and if you do have
better insights than them, don’t worry if you are doing unpopular things.
So how should you deal with your people? Your choices are either to ignore
them (which will lead to resentment and your ignorance of what they are
thinking), blindly do what they want (which wouldn’t be a good idea), or
encourage them to bring their disagreements to the surface and work through
them so openly and reasonably that everyone will recognize the relative merits
of your thinking. Have the open disagreement and be happy to either win or lose
the thought battles, as long as the best ideas win out. I believe that an idea
meritocracy will not only produce better results than other systems but will also
ensure more alignment behind appropriate yet unpopular decisions.
c. Don’t give orders and try to be followed; try to be understood and to understand others
by getting in sync. If you want to be followed, either for egotistical reasons or
because you believe it more expedient to operate that way, you will pay a heavy
price in the long run. When you are the only one thinking, the results will suffer.
Authoritarian managers don’t develop their subordinates, which means those
who report to them stay dependent. This hurts everyone in the long run. If you
give too many orders, people will likely resent them, and when you aren’t
looking, defy them. The greatest influence you can have over intelligent people
—and the greatest influence they will have on you—comes from constantly
getting in sync about what is true and what is best so that you all want the same
things.
10.11 Hold yourself and your people accountable and
appreciate them for holding you accountable.
Holding people accountable means understanding them and their circumstances
well enough to assess whether they can and should do some things differently,
getting in sync with them about that, and, if they can’t adequately do what is
required, removing them from their jobs. It is not micromanaging them, nor is it
expecting them to be perfect (holding particularly overloaded people
accountable for doing everything excellently is often impractical, not to mention
unfair).
But people can resent being held accountable, and you don’t want to have to
tell them what to do all the time. Reason with them so that they understand the
value of what you’re doing, but never let them off the hook.
a. If you’ve agreed with someone that something is supposed to go a certain way, make
sure it goes that way—unless you get in sync about doing it differently. People will
often subconsciously gravitate toward activities they like rather than what’s
required. If they lose sight of their priorities, you need to redirect them. This is
part of why it’s important to get frequent updates from people about their
progress.
b. Distinguish between a failure in which someone broke their “contract” and a failure in
which there was no contract to begin with. If you didn’t make an expectation clear,
you can’t hold people accountable for it not being fulfilled. Don’t assume that
something was implicitly understood. Common sense isn’t actually all that
common—be explicit. If responsibilities keep falling between the cracks,
consider editing the design of your machine.
c. Avoid getting sucked down. This occurs when a manager is pulled down to doing
the tasks of a subordinate without acknowledging the problem. The suckeddown phenomenon bears some resemblance to job slip, since it involves the
manager’s responsibilities slipping into areas that should be left to others. But
while job slipping can make sense on a temporary basis to push through to a
goal, it’s also generally a signal that a part of the machine is broken and needs
fixing. The sucked-down phenomenon is what happens when a manager
chronically fails to properly redesign an area of responsibility to keep him or
herself from having to do the job that others should be capable of doing well.
You can tell this problem exists when the manager focuses more on getting tasks
done than on operating his or her machine.
d. Watch out for people who confuse goals and tasks, because if they can’t make that
distinction, you can’t trust them with responsibilities. People who can see the goals
are usually able to synthesize too. One way to test this: If you ask a high-level
question like “How is goal XYZ going?” a good answer will provide a synthesis
up-front of how XYZ is going overall and, if needed, will support it by
accounting for the tasks that were done to achieve it. People who see the tasks
and lose sight of the goals will just describe the tasks that were done.
e. Watch out for the unfocused and unproductive “theoretical should.” A “theoretical
should” occurs when people assume that others or themselves should be able to
do something when they don’t actually know whether they can (as in “Sally
should be able to do X, Y, Z”). Remember that to really accomplish things you
need believable Responsible Parties who have a track record of success in the
relevant area.
A similar problem occurs when people discuss how to solve a problem by
saying something vague and depersonalized like “We should do X, Y, Z.” It is
important to identify who these people are by name rather than with a vague
“we,” and to recognize that it is their responsibility to determine what should be
done.
It is especially pointless for a group of people who are not responsible to say
things like “We should . . .” to each other. Instead, those people should be
speaking to the Responsible Party about what should be done.
10.12 Communicate the plan clearly and have clear
metrics conveying whether you are progressing
according to it.
People should know the plans and designs within their departments. If you
decide to diverge from an agreed-upon path, be sure to communicate your
thoughts to the relevant parties and get their views so that you are all clear about
the new direction. This allows people to buy into the plan or express their lack of
confidence and suggest changes. It also makes clear what the goals are and who
is keeping up his or her end of the bargain and who is falling short. Goals, tasks,
and assigned responsibilities should be reviewed at department meetings at least
once a quarter, perhaps as often as once a month.
a. Put things in perspective by going back before going forward. Before moving
forward with a new plan, take the time to reflect on how the machine has been
working up till now.
Sometimes people have problems putting current conditions into perspective
or projecting into the future. Sometimes they forget who or what caused things
to go well or poorly. By asking them to “tell the story” of how we got here, or by
telling the story yourself, you highlight important items that were done well or
poorly in relation to their consequences, draw attention to the bigger picture and
the overarching goals, specify the people who are responsible for specific goals
and tasks, and help achieve agreement. Being able to connect all these items at
multiple levels is essential for people to understand the plan, give feedback on it,
and eventually believe in it.
10.13 Escalate when you can’t adequately handle your
responsibilities . . .
. . . and make sure that the people who work for you are proactive about doing the same.
Escalating means saying you don’t believe you can successfully handle a
situation and that you are passing the Responsible Party job to someone else.
The person you are escalating to—the person to whom you report—can then
decide whether to coach you through it, take control themselves, have someone
else handle it, or do something else.
It’s critical that escalation not be seen as a failure but as a responsibility. All
Responsible Parties will eventually face tests that they don’t know whether they
can handle; what’s important is raising their concerns so their boss knows about
the risks and both the boss and the escalating RP can get in sync about what to
do about it. There is no greater failure than to fail to escalate a responsibility you
cannot handle. Make sure your people are proactive; demand that they speak up
when they can’t meet agreed-upon deliverables or deadlines. Such
communication is essential to get in sync both on the case at hand and on what
the person handling it is like.
11 Perceive and Don’t Tolerate Problems
On your way to your goals, you will inevitably encounter problems. To be
successful you must perceive and not tolerate them. Problems are like coal
thrown into a locomotive engine because burning them up—inventing and
implementing solutions for them—propels us forward. Every problem you find
is an opportunity to improve your machine. Identifying and not tolerating
problems is one of the most important and disliked things people can do.
For a lot of people identifying problems is difficult to do. Most people would
rather celebrate all the things that are going well while sweeping problems under
the rug. Those people have their priorities exactly backward, and there is little
that can be more harmful to an organization. Don’t undermine your progress in
pursuit of a pat on the back; celebrate finding out what is not going well so you
can make it go better. Thinking about problems that are difficult to solve may
make you anxious, but not thinking about them (and therefore not dealing with
them) should make you even more anxious.
Having this kind of anxiety about what can go wrong is extremely useful. It is
what drives one to develop systems and metrics for monitoring the outcomes
your machine is producing and motivates those who manage well to constantly
taste-test the outputs of the system and to look for problems in its nooks and
crannies. Having that constant worry and doing the double-checking is important
to maintaining quality control. Making sure that little problems don’t exist is
important because, if they’re allowed to continue, they will grow into big
problems. To convey the point, I will tell you about a case in which we initially
failed to maintain excellence, then perceived the problem, got at its root causes,
designed changes, and pushed those changes through to produce excellent
results.
When I started Bridgewater, I was responsible for everything. I made the
company’s investment decisions and its management decisions and then I built
the organization to support me and eventually to carry on excellently without
me. As Bridgewater grew, the standard I set was uncompromising and
straightforward: The analysis we provide to clients should always be of the same
quality it would be if I did it myself. That’s because when clients ask what “we”
think, they aren’t asking what just anyone thinks—they want to know what I and
the other CIOs, who are in charge of our investments, are thinking. To achieve
that goal, Bridgewater’s Client Service Department either handles the questions
they get from clients themselves or passes them on to people with various levels
of expertise who are assigned to answer questions based on their level of
difficulty. The client advisor (who is a knowledgeable professional designed to
be the interface between Bridgewater and the client) has to understand the
questions well enough to know who they should be routed to, and they need to
review the answers before they go back to the client to ensure they are excellent.
To be certain that always happens, I created a checks-and-balances system in
which some of our best investment thinkers both draft memos to clients
themselves and quality-control their colleagues’ work, grading it to provide
traceable metrics that can be followed to monitor how well things are going and
make changes as needed.
In 2011, as a part of my management transition, I handed the oversight of this
process to others, and several months later one of the people in the Client
Service Department began noticing problems. It started with one memo, which
two senior investment advisors noticed had gone out the door to a client even
though it contained errors. Though these were minor errors, they were important
errors to me. With my prodding, the new management team began investigating
other memos and discovered that this poorly prepared memo wasn’t just a oneoff; it was symptomatic of a more widespread breakdown in the quality control
machine. Worse still, the investigation revealed the Responsible Parties were
failing to perceive and diagnose these problems. And most worrisome, it wasn’t
clear that, without my pushing, anyone else would have taken the time to
investigate.
This initial failure to perceive and not tolerate problems did not happen for
lack of caring; it happened because most of the people in the process paid more
attention to getting the tasks done than assessing whether the goals were being
achieved. They had become more like rubber stampers than craftsmen, while the
top people who were supposed to “taste the soup” to make sure it was excellent
were focused on other things.
Discovering this was disappointing to all of us, because it showed that the
high standards that for so long had been the reasons for our success were
slipping. Facing this reality was painful, but ultimately healthy. The existence of
a problem like this one—whether from a flaw in the design of one’s machine or
from one’s own or others’ inabilities—is not shameful. Acknowledging a
weakness isn’t the same thing as accepting it. It’s a necessary first step toward
overcoming it. The pain one feels, whether from shame and embarrassment, or
frustration at one’s inability to get the better of it, is like the pain one feels at
getting flabby that motivates one to go to the gym. As you’ll see in the following
chapters, facing this problem led to important innovations and improvements.
The following principles flesh out how to perceive and not tolerate the
problems that come your way.
11.1 If you’re not worried, you need to worry—and if
you’re worried, you don’t need to worry.
That’s because worrying about what can go wrong will protect you and not
worrying about what will go wrong will leave you exposed.
11.2 Design and oversee a machine to perceive whether
things are good enough or not good enough, or
do it yourself.
This is usually done by having the right people—people who will probe, who
can’t stand inferior work or products, and who can synthesize well—and by
having good metrics.
a. Assign people the job of perceiving problems, give them time to investigate, and make
sure they have independent reporting lines so that they can convey problems without any
fear of recrimination.Without these things in place, you can’t rely on people
raising all the problems you need to hear about.
b. Watch out for the “Frog in the Boiling Water Syndrome.” Apparently, if you throw
a frog into a pot of boiling water it will jump out immediately, but if you put it in
room-temperature water and gradually bring it to a boil, it will stay in the pot
until it dies. Whether or not that’s true of frogs, I see something similar happen
to managers all the time. People have a strong tendency to slowly get used to
unacceptable things that would shock them if they saw them with fresh eyes.
c. Beware of group-think: The fact that no one seems concerned doesn’t mean nothing is
wrong. If you see something that seems unacceptable to you, don’t assume that
the fact that others also know about it and aren’t screaming means it’s not a
problem. This is an easy trap to fall into—and a deadly one. Whenever you see
badness, point it out to the Responsible Party and hold them accountable for
doing something about it. Never stop saying, “This meal stinks!”
d. To perceive problems, compare how the outcomes are lining up with your goals. This
means comparing the outcomes that the machine is producing to your
visualization of the outcomes you expected so that you can note any deviations.
If you expect improvement to be within a specific range . . .
. . . and it ends up looking like this . . .
. . . you will know that you need to get at the root cause to deal with it. If you
don’t, the trajectory will probably continue.
e. “Taste the soup.” Think of yourself as a chef and taste the soup before it goes
out to the customers. Is it too salty or too bland? Managers need to do that too,
or have someone in their machine do it for them, for every outcome they’re
responsible for. People who are delegated this task are called “taste testers.”
f. Have as many eyes looking for problems as possible. Encourage people to bring
problems to you. If everyone in your area feels responsible for the area’s wellbeing and no one is afraid to speak up, you will learn about problems when they
are still easy to fix and haven’t caused serious damage. Stay in sync with the
people who are closest to the most important functions.
g. “Pop the cork.” It’s your responsibility to make sure communications from your
people flow freely, so encourage it by giving them plenty of opportunities to
speak up. Don’t just expect them to provide you with regular and honest
feedback—explicitly ask them for it.
h. Realize that the people closest to certain jobs probably know them best. At the very
least, they have perspectives you need to understand, so make sure you see
things through their eyes.
11.3 Be very specific about problems; don’t start with
generalizations.
For example, don’t say, “Client advisors aren’t communicating well with the
analysts.” Be specific: Name which client advisors aren’t doing this well and in
which ways. Start with the specifics and then observe patterns.
a. Avoid the anonymous “we” and “they,” because they mask personal responsibility.
Things don’t just happen by themselves—they happen because specific people
did or didn’t do specific things. Don’t undermine personal accountability with
vagueness. Instead of the passive generalization or the royal “we,” attribute
specific actions to specific people: “Harry didn’t handle this well.” Also avoid
“We should . . .” or “We are . . .” and so on. Since individuals are the most
important building blocks of any organization and since individuals are
responsible for the ways things are done, mistakes must be connected to those
individuals by name. Someone created the procedure that went wrong or made
the faulty decision. Glossing over that can only slow progress toward
improvement.
11.4 Don’t be afraid to fix the difficult things.
In some cases, people accept unacceptable problems because they are perceived
as too difficult to fix. Yet fixing unacceptable problems is a lot easier than not
fixing them, because not fixing them will lead to more stress, more work, and
chronic bad outcomes that could get you fired. So remember one of the first
principles of management: You need to look at the feedback you’re getting on
your machine and either fix your problems or escalate them, if need be, over and
over again. There is no easier alternative than bringing problems to the surface
and putting them in the hands of good problem solvers.
a. Understand that problems with good, planned solutions in place are completely
different from those without such solutions. Unidentified problems are the worst;
identified problems without planned solutions are better, but worse for morale;
identified problems with a good planned solution are better still; and solved
problems are best. It’s really important to know which category a problem
belongs to. The metrics you use to track the progress of your solution should be
so clear and intuitive that they are obvious extensions of the plan.
b. Think of the problems you perceive in a machinelike way. There are three steps to
doing this well: First, note the problem; then determine who the RPs to raise it to
are; and finally decide when the right time to discuss it is. In other words: what,
who, when. Then follow through.

12 Diagnose Problems to Get at Their Root
Causes
When you encounter problems, your objective is to specifically identify the root
causes of those problems—the specific people or designs that caused them—and
to see if these people or designs have a pattern of causing problems.
What are the most common reasons for failing to diagnose well?
The most common mistake I see people make is dealing with their problems
as one-offs rather than using them to diagnose how their machine is working so
that they can improve it. They move on to fix problems without getting at their
root causes, which is a recipe for continued failure. A thorough and accurate
diagnosis, while more time-consuming, will pay huge dividends in the future.
The second most common mistake people make is to depersonalize the
diagnosis. Not connecting problems to the people who failed and not examining
what it is about them that caused the failure will not lead to improvements of the
individuals or the machines.
The third biggest reason for failure is to not connect what one is learning in
one diagnosis to what was learned in prior ones. It is important to determine
whether the root cause of a particular problem (“Harry was careless”) is part of a
larger pattern (“Harry is often careless”) or not (“It’s unlike Harry to be
careless”).
In the case of our client service analytics team, I knew that unless we got to
the root cause of the problems, standards would continue to decline.
Bridgewater’s other leaders agreed. So I led a series of diagnostic sessions with
the team, getting everyone at every level into the room to probe and find out
what had gone wrong. I started with my mental map of how things should’ve
gone—based on the machine I’d built—and asked the new managers to describe
what had actually happened. Bad outcomes don’t just happen; they occur
because specific people make, or fail to make, specific decisions. A good
diagnosis always gets to the level of determining what it is about those people
that led to the bad outcomes. This can be uncomfortable but if someone isn’t
suited for a job, they need to be moved out of it so that the same mistakes won’t
keep occurring. Of course, nobody is perfect; everyone makes mistakes. So it is
important to look at people’s track records and their specific strengths and
weaknesses in doing a diagnosis.
Coming out of these sessions, a few things were clear: Several of the new line
managers who the top managers had brought in to run client service analytics
didn’t have the right skills, synthesis abilities, or levels of caring to oversee the
quality-control process; and the top managers were far too distant from the area
and not probing adequately to make sure that everything was going well. This
was the “what is”—the reality we faced that produced our problems. It wasn’t a
pretty picture, but it was exactly what we needed to know in order to move to the
next step of designing the changes we had to make.
The following principles flesh out how to diagnose well, beginning with a
basic overview.
12.1 To diagnose well, ask the following questions:
1. Is the outcome good or bad?
2. Who is responsible for the outcome?
3. If the outcome is bad, is the Responsible Party incapable and/or is the design bad?
If you keep those big questions in mind and anchor back to them, you should
do well. What follows is a guide for getting the answers to these big-picture
questions, mostly using a series of simple either/or questions to help you get to
the synthesis you are looking for at each step. You should think of these as the
answers you need before moving to the next step, leading all the way to the final
diagnosis.
You can, but don’t need to, follow these questions or this format exactly.
Depending on your circumstances, you may be able to move through these
questions quickly or you may need to ask some different, more granular
questions.
Is the outcome good or bad? And who is responsible for the outcome? If you can’t
quickly get in sync that the outcome was bad and who specifically was
responsible, you’re probably already headed for the weeds (in other words, into a
discussion of tiny, irrelevant details).
If the outcome is bad, is the RP incapable and/or is the design bad? The goal is to come
to this synthesis, though to get there you may need to examine how the machine
worked in this instance and build the synthesis from there.
How should the machine have worked? You may have a mental map of who should
have done what, or you may need to fill it in using other people’s mental maps.
In any case, you need to learn who was responsible for doing what and what the
principles say about how things should’ve gone. Keep it simple! At this stage, a
common pitfall is to delve into a granular examination of procedural details
rather than stay at the level of the machine (the level of who was responsible for
doing what). You should be able to crystallize your mental map in just a few
statements, each connected to a specific person. If you are delving into details
here, you are probably off track. Once you’ve established the mental map the
key question is:
Did the machine work as it should have? Yes or no.
If not, what didn’t go as it should have? What broke? This is called the proximate
cause and this step should be easy to get to if you laid out the mental map
clearly. You can do this via yes/no questions as well because it should just
require referring back to the key components of your mental map and
pinpointing which the RP or RPs didn’t do well.
Say your mental map of how the machine should have worked has two steps:
that Harry should have either 1) done his assignment on time or 2) escalated that
he couldn’t. All you have to do is pinpoint the two steps. 1) Did he do it on time?
Yes or no. And if not, 2) did he escalate? Yes or no.
It should be this simple. But this is when the conversation often gets dragged
into gobbledygook, where someone goes into a detailed explanation of “what
they did.” Remember: It’s your job to guide the conversation toward an accurate
and clear synthesis.
You also have to synthesize whether the problem was meaningful—that is,
whether a capable person would have made the same mistake given the
circumstances, or whether it’s symptomatic of something worth digging into.
Don’t focus too much on rare events or the trivial problems—nothing and no one
is perfect—but be sure you are not overlooking a clue to a systemic machine
problem. It’s your job to make that determination.
Why didn’t things go as they should have? This is where you have synthesized the
root cause in order to determine whether the RP is capable or not—or whether
the issue is with the design. In order to anchor back to a synthesis rather than get
lost in the details you might:
• Try to tie the failure to the 5-Step Process. Which step was not done well?
Everything ultimately fits into those five steps. But you may need to get
more specific, so:
• Try to crystallize the failure as a specific key attribute or set of attributes.
Ask yes/no questions: Did the RP not manage well? Not perceive problems
well? Not execute well?
• Importantly, ask yourself this question: If X attribute is done well next time,
will the bad outcome still occur? This is a good way of making sure you are
logically connecting the outcome back to the case. Think of it this way: If
your mechanic replaced that part in your car, would that fix it?
• If the root cause is a faulty design, don’t stop there. Ask who was
responsible for the faulty design and whether they are capable of designing
well.
Is the root cause a pattern? (Yes or no.) Any problem can be a one-off
imperfection—or it could be a symptom of a root cause that will show up
repeatedly. You need to determine which it is. In other words, if Harry failed to
do the assignment due to reliability:
• Does Harry have a reliability problem in general?
• If so, is reliability required for the role?
• Is Harry’s failure due to training or abilities?
How should the people/machines evolve as a result? Confirm that the short-term
resolution of the issue has been addressed, as needed. Determine the steps to be
taken for long-term solutions and who is responsible for those steps.
Specifically:
• Are there responsibilities that need to be assigned or clarified?
• Are there machine designs that need to be reworked?
• Are there people whose fit for their roles needs to be reevaluated?
For example, if you’ve determined that 1) it’s a pattern, 2) the RP is missing
an attribute that’s required for the role, and 3) the attribute is missing due to the
RP’s ability (not their training)—then you’ve likely been able to determine the
answer to your most important question: the person is not capable and needs to
be sorted from the role.
The following principles further flesh out how to diagnose well.
a. Ask yourself: “Who should do what differently?” I often hear people complaining
about a particular outcome without attempting to understand the machine that
caused it. In many cases, these complaints come from people who are seeing the
cons of some decision but not the pros and don’t know how the Responsible
Party weighed them to come to a decision. Since all outcomes ultimately come
from people and designs, asking yourself “Who should do what differently?”
will point you in the direction of the kind of understanding that you need to
actually change outcomes in the future (versus just chirping about them).
b. Identify at which step in the 5-Step Process the failure occurred. If a person is
chronically failing, it is due to a lack of training or a lack of ability. Which is it?
At which of the five steps did the person fail? Different steps require different
abilities and if you can identify which abilities are lacking, you’ll go a long way
toward diagnosing the problem.
c. Identify the principles that were violated. Identify which principles apply to the
case at hand, review them, and see if they would have helped. Think for yourself
which principles are best for handling similar cases. This will help solve not only
this problem but other problems like it.
d. Avoid Monday morning quarterbacking. Evaluate the merits of a past decision
based not on what you know now but only on what you could have reasonably
known at the time the decision was made. Every decision has pros and cons; you
can’t evaluate choices in retrospect without the appropriate context. Do this by
asking yourself, “What should a quality person have known and done in that
situation?” Also, have a deep understanding of the person who made the
decision (how they think, the type of person they are, whether they learned from
the situation, and so on).
e. Don’t confuse the quality of someone’s circumstances with the quality of their
approach to dealing with the circumstances. One can be good and the other can be
bad, and it’s easy to confuse which is which. Such confusion is especially
common in organizations that are doing new things and evolving fast but haven’t
yet gotten the kinks out.
I have always described Bridgewater as being “terrible and terrific at the
same time.” For nearly forty years, we have consistently produced extraordinary
results while struggling with lots of problems. It is easy to look at messy
circumstances, think things must be terrible, and get frustrated. But the real
challenge is to look at the long-term successes these messy circumstances have
produced and understand how essential they are to the evolutionary process of
innovation.
f. Identifying the fact that someone else doesn’t know what to do doesn’t mean that you
know what to do. It’s one thing to point out a problem; it’s another to have an
accurate diagnosis and a quality solution. As described earlier, the litmus test for
a good problem solver is 1) they are able to logically describe how to handle the
problem and 2) they have successfully solved similar problems in the past.
g. Remember that a root cause is not an action but a reason. Root causes are described
in adjectives, not verbs, so keep asking “why” to get at them. Since most things
are done or not done because someone decided to do them or not do them in a
certain way, most root causes can be traced to specific people who have specific
patterns of behavior. Of course, a normally reliable person can make the
occasional error and if that’s the case, then it can be forgiven, but when a
problem is attributable to a person, you have to ask why they made the mistake
—and you have to be as accurate in diagnosing a fault in a person as you would
be if he or she were a piece of equipment.
A root cause discovery process might proceed like this:
The problem was due to bad programming.
Why was there bad programming?
Because Harry programmed it badly.
Why did Harry program it badly?
Because he wasn’t well trained and because he was in a rush.
Why wasn’t he well trained? Did his manager know that he wasn’t well
trained and let him do the job anyway, or did he not know?
Consider how personal the questioning is. It doesn’t stop at “Because Harry
programmed it badly.” You must go deeper in order to understand what about
the people and/or the design led to the failure. This is difficult for both the
diagnoser and the RPs, and it often results in people bringing up all kinds of
irrelevant details. Be on your guard because people will often look to cover
themselves by diving into the weeds.
h. To distinguish between a capacity issue and a capability issue, imagine how the person
would perform at that particular function if they had ample capacity. Think back on
how the person performed in similar functions when they had ample capacity. If
the same kinds of problems came up, then the problem is very likely one of
capabilities.
i. Keep in mind that managers usually fail or fall short of their goals for one (or more) of
five reasons.
1. They are too distant.
2. They have problems perceiving bad quality.
3. They have lost sight of how bad things have become because they have
gotten used to it.
4. They have such high pride in their work (or such large egos) that they can’t
bear to admit they are unable to solve their own problems.
5. They fear adverse consequences from admitting failure.
12.2 Maintain an emerging synthesis by diagnosing
continuously.
If you don’t look into significant bad outcomes as they occur, you won’t be able
to understand what things they are symptomatic of or how they are changing
through time—i.e., are they getting better or worse?
12.3 Keep in mind that diagnoses should produce
outcomes.
If they don’t, there’s no purpose to them. At a minimum, a diagnosis should take
the form of theories about root causes and clarity about what information needs
to be gathered to find out more. At best, it should lead directly to a plan or
design to fix the problem or problems.
a. Remember that if you have the same people doing the same things, you should expect
the same results. Einstein defined insanity as doing the same thing over and over
and expecting different results. Don’t fall into this trap because you’ll have a
hard time getting out of it.
12.4 Use the following “drill-down” technique to gain an
80/20 understanding of a department or subdepartment that is having problems.
A drill-down is a process that allows you to gain an understanding of the root
causes of the biggest problems in a department or area so you can design a plan
to make the area excellent. Drill-downs are not diagnoses, but a form of broad
and deep probing. They’re not intended to uncover the causes of every problem:
only the 20 or so percent of causes that produce 80 percent of the suboptimal
effects. A drill-down takes place in two steps and is then followed by design and
execution steps. If done well, the two drill-down steps can be done in about four
hours. It is very important that the steps be done separately and independently,
so as not to go in too many directions at once. Let me take you through the drilldown process, offering guidance and examples for each step.
Step 1: List the Problems. Quickly inventory all the core problems. Be very
specific, as this is the only way to effectively find solutions. Don’t generalize or
use the plural “we” or “they.” Name the names of the people experiencing the
problems.
• Have all the relevant people from the area under scrutiny participate in the
drill-down; you will benefit from their insights and it will drive their
ownership of the solution.
• Don’t focus on rare events or the trivial problems—nothing is perfect—but
be sure they are not symptoms of systematic machine problems.
• Don’t try to find solutions yet. Your focus in this step is strictly on listing the
problems.
Step 2: Identify the Root Causes. For each problem, identify the deep-seated reason
behind the actions that caused each problem. Most problems happen for one of
two reasons: 1) It isn’t clear who the Responsible Party is, or 2) The Responsible
Party isn’t handling his/her responsibilities well.
You must distinguish proximate causes from root causes. Proximate causes
are the reasons or actions that led to the problem. When you start describing the
qualities behind these reasons or actions, you are getting closer to the root cause.
To get at the root cause, keep asking “Why?” For example:
Problem:
The team is continually working late and is on the verge of burning out.
Why?
Because we don’t have enough capacity to meet the demand put on the team.
Why?
Because we inherited this new responsibility without additional staff.
Why?
Because the manager did not understand the volume of work before
accepting the responsibility.
Why?
Because the manager is bad at anticipating problems and creating plans.
[Root Cause]
Do not exclude any relevant people from the drill-down: Besides losing the
benefit of their ideas, you’ll disenfranchise them from the game plan and reduce
their sense of ownership. At the same time, remember that people tend to be
more defensive than self-critical. It is your job as a manager to get at truth and
excellence, not to make people happy. For example, the correct path might be to
fire some people and replace them with better people, or put them in jobs they
might not want. Everyone’s objective must be to get at the best answers, not the
answers that will make the most people happy.
You may find that multiple problems identified in Step 1 share the same root
cause. Because you are doing a drill-down in a quick session, your root cause
diagnoses may only be provisional—essentially alerts about things to watch out
for.
When Step 2 is completed, take a break to reflect; then come up with a plan.
Step 3: Create a Plan. Step away from the group and develop a plan that addresses
the root causes. Plans are like movie scripts, where you visualize who will do
what through time to achieve the goals. They are developed by iterating through
multiple possibilities, weighing the likelihood of goal achievement versus costs
and risks. They should have specific tasks, outcomes, Responsible Parties,
tracking metrics, and timelines. Allow the key people involved to discuss the
plan thoroughly. Not everyone needs to agree on the plan but the Responsible
Parties and other key people must be in sync.
Step 4: Execute the Plan. Execute the agreed-upon plan and transparently track its
progress. At least monthly, report on the planned and actual progress to date and
the expectations for the coming period, and hold people publicly accountable for
delivering their outcomes successfully and on time. Make adjustments to the
plan as required to reflect reality.
12.5 Understand that diagnosis is foundational to both
progress and quality relationships.
If you and others are open-minded and engage in a quality back-and-forth, not
only will you find better solutions, you will also get to know each other better. It
is an opportunity for you to assess your people and to help them grow—and vice
versa.
13 Design Improvements to Your
Machine to Get Around Your Problems
Once you’ve successfully diagnosed the problems standing in the way of your
achieving your goals, you need to design paths for solving them. Designs need to
be based on deep and accurate understandings (which is why diagnosis is so
important); for me, it’s an almost visceral process of staring at problems and
using the pain they cause me to stimulate my creative thinking.
This is exactly how it was for the team responsible for client service analytics
—and especially for Bridgewater’s co-CEO David McCormick, who was then
head of the Client Service Department. Coming out of the diagnosis, he moved
quickly to design and implement changes. He fired the team members who had
allowed standards to slip and reflected deeply on what new designs he could
implement to get the right people into the right roles. In selecting his new
Responsible Parties for client service analytics, he picked one of our top
investment thinkers who also had extremely high standards (and was very
outspoken about cases where he saw them slipping) and paired him with one of
our most experienced managers, who knew how to build the right process flows
and make sure everything that needed to happen would go precisely as planned.
But that wasn’t all. When coming up with a design, it’s impor-tant to take
time to reflect and make sure you’re looking at the problems from the highest
level. David knew it would be a mistake to look only at this one part of the
department, because the same slip in quality that had happened there was likely
to have occurred in other places too. He needed to think creatively to come up
with a design that would build a durable culture of pervasive excellence
throughout the entire department. This led to his invention of “Quality Day,”
biannual meetings in which members of the Client Service Department would
review each other’s mock presentations and memos and give direct feedback on
what was good and what wasn’t. More importantly, the meetings were a chance
to step back and assess whether the ways of ensuring quality were working as
expected—by bringing in a bunch of tough, independent thinkers to offer
criticism and get the process realigned on what good looks like.
Of course, there were many more details to all of David’s plans for
transforming the department. But the important thing is how all the details and
plans extended from a high-level visualization of what was required. Only when
you have such a sketch can you begin to fill it in with specifics. Those specifics
will be your tasks; write them down so you don’t forget them.
While the best designs are drawn from a rich understanding of actual
problems, when you’re just starting out on something, you often have to design
based on anticipated problems as opposed to actual ones. That’s why having
systematic ways of tracking issues (the Issue Log) and what people are like (the
Dot Collector) is so useful: Instead of just relying on your best guesses of what
might go wrong, you can look at data from prior “at bats” for yourself and others
and come to the design process with understanding rather than having to start
from scratch.
The most talented designers I know are people who can visualize over time,
running through different collections of people from the scale of small teams to
entire organizations, accurately anticipating the kinds of results they’ll produce.
They excel at design and systemization. Hence the overriding principle of this
chapter: Design and systemize your machine. Creativity is also important to this
process, as is character, because the most important problems to design around
are often the hardest, and you need to come up with original ways of addressing
them and be willing to make hard choices (especially when it comes to people
and who should do what).
The following principles delve into designing and how to do it well.
13.1 Build your machine.
Focus on each task or case at hand and you will be stuck dealing with them one
by one. Instead, build a machine by observing what you’re doing and why,
extrapolating the relevant principles from the cases at hand, and systemizing that
process. It typically takes about twice as long to build a machine as it does to
resolve the task at hand, but it pays off many times over because the learning and
efficiency compound into the future.
13.2 Systemize your principles and how they will be
implemented.
If you have good principles that guide you from your values to your day-to-day
decisions but you don’t have a systematic way of making sure they’re regularly
applied, they’re not of much use. It’s essential to build your most important
principles into habits and help others do so as well. Bridgewater’s tools and
culture are designed to do just that.
a. Create great decision-making machines by thinking through the criteria you are using
to make decisions while you are making them.Whenever I make an investment
decision, I observe myself making it and think about the criteria I used. I ask
myself how I would handle another one of those situations and write down my
principles for doing so. Then I turn them into algorithms. I am now doing the
same for management and I have gotten in the habit of doing it for all my
decisions.
Algorithms are principles in action on a continuous basis. I believe that
systemized, evidence-based decision making will radically improve the quality
of management. Human managers process information spontaneously using
poorly thought-out criteria and are unproductively affected by their emotional
biases. These all lead to suboptimal decisions. Imagine what it would be like to
have a machine that processes high-quality data using high-quality decisionmaking principles/criteria. Like the GPS in your car, it would be invaluable,
whether you follow all of its suggestions or not. I believe that such tools will be
essential in the future, and as I write these words, I am a short time away from
getting a prototype online.
13.3 Remember that a good plan should resemble a
movie script.
The more vividly you can visualize how the scenario you create will play out,
the more likely it is to happen as you plan. Visualize who will do what when and
the result they’ll produce. This is your mental map of your machine. Recognize
that some people are better or worse at visualization. Accurately assess your own
abilities and those of others so you can use the most capable people to create
your plans.
a. Put yourself in the position of pain for a while so that you gain a richer understanding
of what you’re designing for. Either literally or vicariously (through reading reports,
job descriptions, etc.), temporarily insert yourself into the workflow of the area
you’re looking at to gain a better understanding of what it is that you are dealing
with. As you design, you’ll be able to apply what you’ve learned, and revise the
machine appropriately as a result.
b. Visualize alternative machines and their outcomes, and then choose. A good designer
is able to visualize the machine and its outcomes in various iterations. First they
imagine how Harry, Larry, and Sally can operate in various ways with various
tools and different incentives and penalties; then they replace Harry with
George, and so on, thinking through what the products and people and finances
would look like month by month (or quarter by quarter) under each scenario.
Then they choose.
c. Consider second- and third-order consequences, not just first-order ones. The
outcome you get as a first-order consequence might be desirable, while the
second- or third-order consequences could be the opposite. So focusing solely on
first-order consequences, which people tend to do, can lead to bad decision
making. For example, if you asked me if I’d like to not have rainy days, I
probably would say yes if I didn’t consider the second- and third-order
consequences.
d. Use standing meetings to help your organization run like a Swiss clock. Regularly
scheduled meetings add to overall efficiency by ensuring that important
interactions and to-do’s aren’t overlooked, eliminating the need for inefficient
coordination, and improving operations (because repetition leads to refinement).
It pays to have standardized meeting agendas that ask the same feedback
questions in each meeting (such as how effective the meeting was) and
nonstandard meeting agendas that include things done infrequently (such as
quarterly budget reviews).
e. Remember that a good machine takes into account the fact that people are imperfect.
Design in such a way that you produce good results even when people make
mistakes.
13.4 Recognize that design is an iterative process.
Between a bad “now” and a good “then” is a
“working through it” period.
That “working through it” period is when you try out different processes and
people, seeing what goes well or poorly, learning from the iterations, and
moving toward the ideal systematic design. Even with a good future design
picture in mind, it will naturally take some mistakes and learning to get to a good
“then” state.
People frequently complain about this kind of iterative process because it
tends to be true that people are happier with nothing at all than with something
imperfect, even though it would be more logical to have the imperfect thing.
That kind of thinking doesn’t make sense, so don’t let it distract you.
a. Understand the power of the “cleansing storm.” In nature, cleansing storms are big
infrequent events that clear out all the overgrowth that’s accumulated during
good times. Forests need these storms to be healthy—without them, there would
be more weak trees and a buildup of overgrowth that stifles other growth. The
same is true for companies. Bad times that force cutbacks so only the strongest
and most essential employees (or companies) survive are inevitable and can be
great, even though they seem terrible at the time.
13.5 Build the organization around goals rather than
tasks.
Giving each department a clear focus and the appropriate resources to achieve its
goals makes the diagnosis of resource allocations more straightforward and
reduces job slip. As an example of how this works, at Bridgewater we have a
Marketing Department (goal: to market) that is separate from our Client Service
Department (goal: to service clients), even though they do similar things and
there would be advantages to having them work together. But marketing and
servicing clients are two distinct goals; if they were merged, the department
head, salespeople, client advisors, analysts, and others would be giving and
receiving conflicting feedback. If asked why clients were receiving relatively
poor attention, the answer might be: “We have incentives to raise sales.” If asked
why they weren’t making sales, the merged department might explain that they
need to take care of their clients.
a. Build your organization from the top down. An organization is the opposite of a
building: Its foundation is at the top, so make sure you hire managers before you
hire their reports. Managers can help design the machine and choose the people
who complement it. People overseeing departments need to be able to think
strategically as well as run the day-to-day. If they don’t anticipate what’s coming
up, they’ll run the day-to-day off a cliff.
b. Remember that everyone must be overseen by a believable person who has high
standards. Without strong oversight, there is potential for inadequate quality
control, inadequate training, and inadequate appreciation of excellent work.
Never just trust people to do their jobs well.
c. Make sure the people at the top of each pyramid have the skills and focus to manage
their direct reports and a deep understanding of their jobs. A few years ago, someone
at Bridgewater proposed that our facilities group (the people who take care of
the building and grounds, food service, office supplies, etc.) should begin to
report to our head of technology because of the overlap in the two areas
(computers are a facility too, they use electricity, and so on). But having the
people who are responsible for janitorial services and meals report to a
technology manager would be as inappropriate as having technology people
report to the person taking care of facilities. These functions, even if they’re
considered “facilities” in the broadest sense, are very different, as are the
respective skill sets. Similarly, at another time, we talked about putting the folks
who work on client agreements under the same manager as those who do
counterparty agreements. But that would have been a mistake because the skills
required to reach agreements with clients are very different from the skills
required to reach agreements with counterparties. It would be wrong to conflate
both departments under the general heading of “agreements,” because each calls
for specific knowledge and skills.
d. In designing your organization, remember that the 5-Step Process is the path to success
and that different people are good at different steps. Assign specific people to do
each of these steps based on their natural inclinations.
For example, the big-picture visionary should be responsible for goal setting,
the taste tester should be assigned the job of identifying and not tolerating
problems, the logical detective who doesn’t mind probing people should be the
diagnoser, the imaginative designer should craft the plan to make the
improvements, and the reliable taskmaster should make sure the plan gets
executed. Of course, some people can do more than one of these things—
generally people do two or three well. Virtually nobody can do them all well. A
team should consist of people with all of these abilities and they should know
who is responsible for which steps.
e. Don’t build the organization to fit the people. Managers will often take the people
who work in their organization as a given and try to make the organization work
well with them. That’s backward. Instead, they should imagine the best
organization and then make sure the right people are chosen for it. Jobs should
be created based on the work that needs to be done, not what people want to do
or which people are available. You can always search outside to find the people
who click best for a particular role. First come up with the best workflow design,
then sketch it out on an organizational chart, visualize how the parts interact, and
specify what qualities are required for each job. Only after all that is done should
you choose the people to fill the slots.
f. Keep scale in mind. Your goals must be the right size to warrant the resources
that you allocate to them. An organization might not be big enough to justify
having both a sales and an analytics group, for example. Bridgewater
successfully evolved from a one-cell organization, in which most people were
involved in everything, to a multi-cellular organization because we retained our
ability to focus efficiently as we grew.
Temporarily sharing or rotating resources is fine and is not the same as a
merging of responsibilities. On the other hand, the efficiency of an organization
decreases as the number of people and/or its complexity increases, so keep
things as simple as possible. And the larger the organization, the more important
are information technology management and cross-departmental
communication.
g. Organize departments and sub-departments around the most logical groupings based
on “gravitational pull.” Some groups naturally gravitate toward one another. That
gravitational pull might be based on common goals, shared abilities and skills,
workflow, physical location, and so forth. Imposing your own structure without
acknowledging these magnetic pulls will likely result in inefficiency.
h. Make departments as self-sufficient as possible so that they have control over the
resources they need to achieve their goals. We do this because we don’t want to
create a bureaucracy that forces departments to requisition resources from a pool
that lacks the focus to do the job.
i. Ensure that the ratios of senior managers to junior managers and of junior managers to
their reports are limited to preserve quality communication and mutual understanding.
Generally, the ratio should not be more than 1:10, and preferably closer to 1:5.
Of course, the appropriate ratio will vary depending on how many people your
direct reports have reporting to them, the complexity of the jobs they’re doing,
and a manager’s ability to handle several people or projects at once. The number
of layers from top to bottom and the ratio of managers to their direct reports will
limit the size of an effective organization.
j. Consider succession and training in your design. This is a subject I wish I had
thought about much earlier in my career. To ensure that your organization
continues to deliver results, you need to build a perpetual motion machine that
can work well without you. This involves more than the mechanics of your own
“stepping out,” but the selection and training and governance of the new leaders
who “step up,” and most importantly, the preservation of the culture and its
values.
The best approach I’ve seen for doing this is what companies and
organizations like GE, 3G, and the Chinese Politburo do, which is to build a
pyramid-like “succession pipeline” in which the next generation of leaders is
exposed to the thinking and decision making of the current leaders so they can
both learn and be tested.
k. Don’t just pay attention to your job; pay attention to how your job will be done if you
are no longer around. I wrote about key-man risk earlier, which applies the most to
those with the largest areas of responsibility, especially the head of an
organization. If that’s you, then you should designate the people who could
replace you and have them do your job for a while so they can be vetted and
tested. These results should be documented in a manual that the appropriate
people can go to if you should be hit by a bus. If all the key people in the
organization do this, you will have a strong “farm team,” or at least a clear
understanding of vulnerabilities and a plan to deal with them. Remember that a
ninja manager is somebody who can sit back and watch beauty happen—i.e., an
orchestrator. If you are always trying to hire somebody who is as good as or
better than you at your job, that will both free you up to go on to other things and
build your succession pipeline.
Beyond that, visualizing your replacement is an enlightening and productive
experience. In addition to taking stock of what you are doing and coming up
with both bad and good names, you will start to think about how to get your best
people into slots that don’t yet exist. Knowing that you will have to test them by
letting them do your job without interference, you will be motivated to train
them properly before the test. And, of course, the stress-testing will help you
learn and adapt, which will lead to better results.
l. Use “double-do” rather than “double-check” to make sure mission-critical tasks are
done correctly. Double-checking has a much higher rate of errors than doubledoing, which is having two different people do the same task so that they
produce two independent answers. This not only ensures better answers but will
allow you to see the differences in people’s performance and abilities. I use
double-do’s in critical areas such as finance, where large amounts of money are
at risk.
And because an audit is only as effective as the auditor is knowledgeable,
remember that a good double-check can only be done by someone capable of
double-doing. If the person double-checking the work isn’t capable of doing the
work himself, how could he possibly evaluate it accurately?
m. Use consultants wisely and watch out for consultant addiction. Sometimes hiring an
external consultant is the best fit for your design. Doing so can get you precisely
the amount of specialized expertise you need to tackle a problem. When you can
outsource you don’t have to worry about managing, and that’s a real advantage.
If a position is part-time and requires highly specialized knowledge, I would
prefer to have it done by consultants or outsiders.
At the same time, you need to beware of the chronic use of consultants to do
work that should be done by employees. This will cost you in the long run and
erode your culture. Also make sure you are careful not to ask consultants to do
things that they don’t normally do. They will almost certainly revert to doing
things in their usual way; their own employers will demand that.
When evaluating whether to use a consultant, consider the following factors:
1. Quality Control. When someone doing work for you is an employee, you
are responsible for the quality of their work. But when the person working
for you works for another company, you’re operating by their standards, so
it’s important to know whether their standards are as high or higher than
yours.
2. Economics. If a full-time person is required, it is almost certainly more
cost-effective to create a position. Consultants’ daily rates add up to
considerably more than the annualized cost of a full-time person.
3. Institutionalization of Knowledge. Someone who is around your
environment on an ongoing basis will gain knowledge and an appreciation
of your culture that no outsider can.
4. Security. Having outsiders do the job substantially increases your security
risks, especially if you can’t see them at work (and monitor whether they
follow proper precautions, like not leaving sensitive documents on their
desks).
You have to consider whether you should be outsourcing or developing
capabilities in-house. Though temps and consultants are good for a quick fix,
they won’t augment your capacities in the long term.
13.6 Create an organizational chart to look like a
pyramid, with straight lines down that don’t
cross.
The whole organization should look like a series of descending pyramids, but the
number of layers should be limited to minimize hierarchy.
a. Involve the person who is the point of the pyramid when encountering crossdepartmental or cross-sub-departmental issues. Imagine an organizational chart as a
pyramid that consists of numerous pyramids.
When issues involve parties not in the same part of the pyramid, it is
generally desirable to involve the person who is at the point of the pyramid, and
thus has the perspective and knowledge to weigh the trade-offs and make
informed decisions.
b. Don’t do work for people in another department or grab people from another
department to do work for you unless you speak to the person responsible for overseeing
the other department. If there is a dispute about this, it needs to be resolved at the
point of the pyramid.
c. Watch out for “department slip.” This happens when a support department
mistakes its responsibility to provide support with a mandate to determine how
the thing they are supporting should be done. An example of this sort of mistake
would be if the facilities group thought it should determine what facilities we
should have. While support departments should know the goals of the people
they’re supporting and provide feedback regarding possible choices, they are not
the ones to determine the vision.
13.7 Create guardrails when needed—and remember
it’s better not to guardrail at all.
Even when you find people who are great clicks for your design, there will be
times when you’ll want to build guardrails around them. No one is perfect,
everyone has strengths and weaknesses, and as hard as you look, you won’t
always be able to find everything you want in one person. So look down on your
machine and the people you choose for your roles, and think about where you
might need to supplement your design by adding people or processes to ensure
that each job is done excellently.
Remember, guardrailing is meant to help people who can by and large do
their jobs well—it’s intended to help good people perform better, not to help
failing people reach the bar. If you’re trying to guardrail someone who is
missing the core abilities required for their job, you should probably just fire
them and look for someone else who will be a better click.
A good guardrail typically takes the form of a team member whose strengths
compensate for the weaknesses of the team member who needs to be
guardrailed. A good guardrailing relationship should be firm without being
overly rigid. Ideally, it should work like two people dancing—they’re literally
pushing against each other, but with a lot of mutual give-and-take. Of course,
having someone in a job who needs to be guardrailed is not as good as having
someone in a job who will naturally do the right things. Strive for that.
a. Don’t expect people to recognize and compensate for their own blind spots. I
constantly see people form wrong opinions and make bad decisions, even though
they’ve made the same kinds of mistakes before—and even though they know
that doing so is illogical and harmful. I used to think that they would avoid these
pitfalls when they became aware of their blind spots, but typically that’s not the
case. Only very rarely do I hear someone recuse himself from offering an
opinion because they aren’t capable of forming a good one in a particular area.
Don’t bet on people to save themselves; proactively guardrail them or, better yet,
put them in roles in which it’s impossible for them to make the types of
decisions they shouldn’t make.
b. Consider the clover-leaf design. In situations where you’re unable to identify one
excellent Responsible Party for a role (which is always best), find two or three
believable people who care deeply about producing excellent results and are
willing to argue with each other and escalate their disagreements if necessary.
Then set up a design in which they check and balance each other. Though it’s
not optimal, such a system will have a high probability of effectively sorting the
issues you need to examine and resolve.
13.8 Keep your strategic vision the same while making
appropriate tactical changes as circumstances
dictate.
Bridgewater’s values and strategic goals have been the same since the beginning
(to produce excellent results, meaningful work, and meaningful relationships
through radical truth and transparency) but its people, systems, and tools have
changed over forty-plus years as we have grown from a one-person company to
a 1,500-person organization—and they can continue to change while
maintaining values and strategic goals as newer generations replace older ones.
That can happen for organizations in much the same way as it happens for
families and communities. To help nurture that, it is desirable to reinforce the
traditions and reasons for them, as well as to make sure the values and strategic
goals are imbued in the successive leaders and the population as a whole.
a. Don’t put the expedient ahead of the strategic. People often tell me they can’t deal
with the longer-term strategic issues because they have too many pressing issues
they need to solve right away. But rushing into ad hoc solutions while kicking
the proverbial can down the road is a “path to slaughter.” Effective managers
pay attention both to imminent problems and to problems that haven’t hit them
yet. They constantly feel the tug of the strategic path because they worry about
not getting to their ultimate goal and they are determined to continue their
process of discovery until they do. While they might not have the answer right
away, and they might not be able to come up with it by themselves, through a
combination of creativity and character they eventually make all the necessary
upward loops.
b. Think about both the big picture and the granular details, and understand the
connections between them. Avoid fixating on irrelevant details. You have to
determine what’s important and what’s unimportant at each level. For example,
imagine you are designing a house. First you need to start with the big picture:
Your house will sit on a plot of land, and you have to think through where the
water comes from, how the house gets hooked up to the power grid, and so on.
Then you need to decide how many rooms it will have, where the doors will go,
where you need windows, and so on. When designing the plan, you need to think
about all of these things and connect them, but that doesn’t mean that you
actually need to go out and pick the hinges for the door yourself. You just need
to know that you’ll need a door with hinges and how it fits into the bigger
picture of the house.
13.9 Have good controls so that you are not exposed to
the dishonesty of others.
Don’t assume that people are operating in your interest rather than their own. A
higher percentage of the population than you might imagine will cheat if given
the opportunity. When offered the choice of being fair with you or taking more
for themselves, most people will take more for themselves. Even a tiny amount
of cheating is intolerable, so your happiness and success will depend on your
controls. I have repeatedly learned this lesson the hard way.
a. Investigate and let people know you are going to investigate. Investigate and explain
to people that you are going to investigate so there are no surprises. Security
controls should not be taken personally by the people being checked, just like a
teller shouldn’t view the bank counting the money in the drawer (rather than just
accepting the teller’s count) as an indication that the bank thinks the teller is
dishonest. Explain that concept to employees so that they understand it.
But even the best controls will never be foolproof. For that reason (among
many others), trustworthiness is a quality that should be appreciated.
b. Remember that there is no sense in having laws unless you have policemen (auditors).
The people doing the auditing should report to people outside the department
being audited, and auditing procedures should not be made known to those being
audited. (This is one of our few exceptions to radical transparency.)
c. Beware of rubber-stamping. When a person’s role involves reviewing or auditing
a high volume of transactions or things that other people are doing, there’s a real
risk of rubber-stamping. One particularly risky example is expense approvals.
Make sure you have ways to audit the auditors.
d. Recognize that people who make purchases on your behalf probably will not spend
your money wisely. This is because 1) it is not their money and 2) it is difficult to
know what the right price should be. For example, if somebody proposes a price
of $125,000 for a consulting project, it is unpleasant, difficult, and confusing to
figure out what the market rate is and then negotiate a better price. But the same
person who’s reluctant to negotiate with the consultant will bargain furiously
when he is hiring someone to paint his own house. You need to have proper
controls, or better yet, a part of the organization that specializes in this kind of
thing. There’s retail and there’s wholesale. You want to pay wholesale whenever
possible.
e. Use “public hangings” to deter bad behavior. No matter how carefully you design
your controls and how rigorously you enforce them, malicious and grossly
negligent people will sometimes find a way around them. So when you catch
someone violating your rules and controls, make sure that everybody sees the
consequences.
13.10 Have the clearest possible reporting lines and
delineations of responsibilities.
This applies both within and between departments. Dual reporting causes
confusion, complicates prioritization, diminishes focus on clear goals, and
muddies the lines of supervision and accountability—especially when the
supervisors are in two different departments. When situations require dual
reporting, managers need to be informed. Asking someone from another
department to do a task without consulting with his or her manager is strictly
prohibited (unless the request will take less than an hour or so). However,
appointing co-heads of a department or a sub-department can work well if the
managers are in sync and combine complementary and essential strengths; dual
reporting in that case can work well if properly coordinated.
a. Assign responsibilities based on workflow design and people’s abilities, not job titles.
Just because someone is responsible for “Human Resources,” “Recruiting,”
“Legal,” “Programming,” and so forth, doesn’t necessarily mean they are the
appropriate person to do everything associated with those functions. For
example, though HR people help with hiring, firing, and providing benefits, it
would be a mistake to give them the responsibility of determining who gets hired
and fired and what benefits are provided to employees.
b. Constantly think about how to produce leverage. Leverage in an organization is not
unlike leverage in the markets; you’re looking for ways to achieve more with
less. At Bridgewater, I typically work at about 50:1 leverage, meaning that for
every hour I spend with each person who works for me, they spend about fifty
hours working to move the project along. At our sessions, we go over the vision
and the deliverables, then they work on them, and then we review the work, and
they move forward based on my feedback—and we do that over and over again.
The people who work for me typically have similar relationships with those who
work for them, though their ratios are typically between 10:1 and 20:1. I am
always eager to find people who can do things nearly as well as (and ideally
better than) I can so that I can maximize my output per hour.
Technology is another great tool for providing leverage. To make training as
easy to leverage as possible, document the most common questions and answers
through audio, video, or written guidelines, and then assign someone to organize
them and incorporate them into a manual, which is updated on a regular basis.
Principles themselves are a form of leverage—they’re a way to compound
your understanding of situations so that you don’t need to exert the same effort
each time you encounter a problem.
c. Recognize that it is far better to find a few smart people and give them the best
technology than to have a greater number of ordinary people who are less well equipped.
Great people and great technology both enhance productivity. Put them together
in a well-designed machine and they improve it exponentially.
d. Use leveragers. Leveragers are people who can go from conceptual to practical
effectively and do the most to get your concepts implemented. Conceptualizing
and managing takes only about 10 percent of the time needed for implementing,
so if you have good leveragers, you can devote a lot more of your time to what’s
most important to you.
13.11 Remember that almost everything will take more
time and cost more money than you expect.
Virtually nothing goes according to plan because one doesn’t plan for the things
that go wrong. I personally assume things will take about one and a half times as
long and cost about one and a half times as much because that’s what I’ve
typically experienced. How well you and the people working with you manage
will determine your expectations.

14 Do What You Set Out to Do
The organization, like the individual, has to push through to results in order to
succeed—this is step five in the 5-Step Process.
While recently cleaning up a huge pile of work products from the 1980s and
1990s, I came across boxes and boxes full of research. There were thousands of
pages, most covered with my scribbles, and I realized that they represented just a
fraction of the effort I’d put in. At our fortieth-year celebration I was given
copies of the almost ten thousand Bridgewater Daily Observations that we’d
published. Every one of them expressed our deepest thinking and research about
markets and economies. I also stumbled across the manuscript of an eighthundred-page book that I wrote but then got too busy to publish, and countless
other memos and letters to clients, research reports, and versions of the book
you’re reading now. Why did I do all these things? Why do others work so hard
to achieve their goals?
From what I can see, we do it for different reasons. For me, the main reason is
that I can visualize the results of pushing through so intensely that I experience
the thrill of success even while I’m still struggling to achieve it. Similarly, I can
visualize the tragic results of not pushing through. I am also motivated by a
sense of responsibility; I have a hard time letting people I care about down. But
that’s just what’s true for me. Others describe their motivation as attachment to
the community and its mission. Some do it for approval and some do it for
financial rewards. All these are perfectly acceptable motivations and should be
used and harmonized in a way consistent with the culture.
The way one brings people together to do this is key. This is what most
people call “leadership.” What are the most important things that a leader needs
to do in order to get their organizations to push through to results? Most
importantly, they must recruit individuals who are willing to do the work that
success requires. While there might be more glamour in coming up with the
brilliant new ideas, most of success comes from doing the mundane and often
distasteful stuff, like identifying and dealing with problems and pushing hard
over a long time. This was certainly the case with the Client Service Department.
Through a lot of relentless hard work in the years since the original problem
turned up, the department has become an example to other teams at Bridgewater
—and our client satisfaction levels remain consistently high. The great irony of
all this is that none of our clients ever even noticed the problems we saw with
the memos. Sending out work not up to our standards was bad—and I’m glad it
was corrected. But it could’ve been much worse, tarnishing our reputation for
delivering pervasive excellence. Once that happens, it becomes much harder to
restore trust.
14.1 Work for goals that you and your organization are
excited about . . .
. . . and think about how your tasks connect to those goals. If you’re focused
on the goal, excited about achieving it, and recognize that doing some
undesirable tasks to achieve the goal is required, you will have the right
perspective and will be appropriately motivated. If you’re not excited about the
goal that you’re working for, stop working for it. Personally, I like visualizing
exciting new and beautiful things that I want to make into realities. The
excitement of visualizing these ideas and my desire to build them out is what
pulls me through the thorny realities of life to make my dreams happen.
a. Be coordinated and consistent in motivating others. Managing groups to push
through to results can be done emotionally or intellectually, and by carrots or by
sticks. While we each have our own reasons for working, there are unique
challenges and advantages to motivating a community. The main challenge is the
need to coordinate, i.e., to get in sync on the reasons for pursuing a goal and the
best way to do it. For example, you wouldn’t want one group to be motivated
and compensated so differently from another (one gets big bonuses for example,
and another doesn’t under the same set of circumstances) that the differences
cause problems. The main advantage of working in groups is that it’s easier to
design a group to include all the qualities needed to be successful than to find all
those qualities in one person. As with the steps in the 5-Step Process, some
people are great at one step and some are terrible at that step. But it doesn’t
matter which is the case when everyone is clear on each other’s strengths and
weaknesses and the group is designed to deal with those realities.
b. Don’t act before thinking. Take the time to come up with a game plan. The time you
spend on thinking through your plan will be virtually nothing in relation to the
amount of time that will be spent doing, and it will make the doing radically
more effective.
c. Look for creative, cut-through solutions. When people are facing thorny problems
or have too much to do, they often think that they need to work harder. But if
something seems hard, time-consuming, and frustrating, take some time to step
back and triangulate with others on whether there might be a better way to
handle it. Of course, many things that need getting done are just a slog, but it’s
often the case that there are better solutions out there that you’re not seeing.
14.2 Recognize that everyone has too much to do.
How to do more than we think we can is a puzzle we all struggle with. Other
than working harder for longer hours, there are three ways to fix the problem: 1)
having fewer things to do by prioritizing and saying no, 2) finding the right
people to delegate to, and 3) improving your productivity.
Some people spend a lot of time and effort accomplishing very little while
others do a lot in the same amount of time. What differentiates people who can
do a lot from those who can’t is creativity, character, and wisdom. Those with
more creativity invent ways to do things more effectively (for instance by
finding good people, good technologies, and/or good designs). Those with more
character are better able to wrestle with their challenges and demands. And those
with more wisdom can maintain their equanimity by going to the higher level
and looking down on themselves and their challenges to properly prioritize,
realistically design, and make sensible choices.
a. Don’t get frustrated. If nothing bad is happening to you now, wait a bit and it
will. That is just reality. My approach to life is that it is what it is and the
important thing is for me to figure out what to do about it and not spend time
moaning about how I wish it were different. Winston Churchill hit the nail on
the head when he said, “Success consists of going from failure to failure without
loss of enthusiasm.” You will come to enjoy this process of careening between
success and failure because it will determine your trajectory.
It makes no sense to get frustrated when there’s so much that you can do, and
when life offers so many things to savor. Your path through any problem is
outlined in these principles—and in others you’ll discover yourself. There’s
nothing you can’t accomplish if you think creatively and have the character to do
the difficult things.
14.3 Use checklists.
When people are assigned tasks, it is generally desirable to have them captured
on checklists. Crossing items off a checklist will serve as both a task reminder
and a confirmation of what has been done.
a. Don’t confuse checklists with personal responsibility. People should be expected to
do their whole job well, not just the tasks on their checklists.
14.4 Allow time for rest and renovation.
If you just keep doing, you will burn out and grind to a halt. Build downtime into
your schedule just as you would make time for all the other stuff that needs to
get done.
14.5 Ring the bell.
When you and your team have successfully pushed through to achieve your
goals, celebrate!
15 Use Tools and Protocols to Shape How
Work Is Done
Words alone aren’t enough.
That’s something I learned from watching people struggle to get themselves
to do things that are in their best interests. After I shared these principles with
the people at Bridgewater and refined them, nearly everyone saw the connection
between the principles and our excellent results and wanted to operate in
accordance with them. But there’s a big difference between wanting to do
something and actually being able to do it. Assuming people will do what they
intellectually want to do is like assuming that people will lose weight simply
because they understand why it’s beneficial for them to do it. It won’t happen
until the proper habits are developed. In organizations, that happens with the
help of tools and protocols.
Take a minute to think about how this applies to your reading of this book, or
reading books in general. How often have you read a book describing some
behavioral change you’ve wanted to make but then failed to? How much
behavioral change do you think will result from this book if you don’t have tools
and protocols to help you? My guess is hardly any. Just as you can’t learn many
things by reading a book (how to ride a bike, speak a language, etc.), it’s nearly
impossible to change a behavior without practicing it. That is why I plan to make
the tools that I describe in the Appendix publicly available.
15.1 Having systemized principles embedded in tools is
especially valuable for an idea meritocracy.
That is because an idea meritocracy needs to operate in accordance with agreedupon principles and to be evidence-based and fair instead of following the more
autocratic and arbitrary decisions of the CEO and his or her lieutenants. Rather
than be above the principles, the people responsible for running the organization
must be evaluated, chosen, and—if needed—replaced in an evidence-based way
according to rules, just like everyone else in the organization. Their strengths
and weaknesses, like everyone’s, must be taken into consideration. Collecting
objective data about all people is essential for this. And you need good tools to
convert data into decisions in agreed-upon ways. Moreover, the tools allow the
people and the system to work together in a symbiotic way to improve each
other.
a. To produce real behavioral change, understand that there must be internalized or
habituated learning. Thankfully, technology has made internalized learning much
easier today than it was when books were the primary way of conveying
knowledge. Don’t get me wrong, the book was a powerful invention. Johannes
Gutenberg’s printing press allowed easy dissemination of knowledge that helped
people build on each other’s learnings. But experiential learning is so much
more powerful. Now that technology makes it so easy to create
experiential/virtual learning, I believe that we are on the brink of another stepchange improvement in the quality of learning that will be as great as or even
greater than Gutenberg’s.
We have been trying to create internalized learning at Bridge-water for a long
time, so how we do it has evolved a lot. Since we tape virtually all our meetings,
we have been able to create virtual learning case studies that allow everyone to
participate without actually being in the room. People see the meeting transpire
as though they were in it, and then the case study pauses and asks them for their
own thinking on the matter at hand. In some cases, they input their reactions in
real time as they watch. Their thinking is recorded and compared with others’
using expert systems that help us all understand more about how we think. With
this information, we can better tailor their learning and their job assignments to
their thinking styles.
That is just one example of a number of tools and protocols we have
developed to help our people learn and operate by our principles.
b. Use tools to collect data and process it into conclusions and actions. Imagine that
virtually everything important going on in your company can be captured as
data, and that you can build algorithms to instruct the computer, as you would
instruct a person, to analyze that data and use it in the way you agreed it should
be used. In that way, you and the computer on your behalf could look at each
person and all the people together and provide tailored guidance, just like your
GPS provides you guidance by knowing all the traffic patterns and routes. You
don’t have to make it mandatory to follow that guidance, though you can.
Generally speaking, the system operates like a coach. And the coach can learn
about its team: Data is collected about what people do so that if they make more
insightful moves or less insightful moves, learning will occur and be used to
create improvements. Because the thinking behind the algorithms is available to
everyone, anyone can assess the quality of the logic and its fairness, and have a
hand in shaping it.
c. Foster an environment of confidence and fairness by having clearly-stated principles
that are implemented in tools and protocols so that the conclusions reached can be
assessed by tracking the logic and data behind them. In all organizations, it’s always
the case that some of the people judged to be ineffective will argue that those
judgments are wrong. When that happens, a data- and rules-based system with
clearly laid-out criteria allows less room for such arguments and greater belief
that the system is fair. Though the system won’t be perfect, it is much less
arbitrary—and can much more easily be examined for bias—than the much less
specified and much less open decision making of individuals with authority. My
ideal is to have a process in which everyone contributes criteria for good
decision making and those criteria are assessed and selected by appropriately
assigned (believable) people. If people maintain the right balance of openmindedness and assertiveness so they understand where they are and aren’t
believable to make decisions, having these open discussions on the criteria for
assessing and managing people can be very powerful in building and reinforcing
the idea meritocracy.
We have early-stage tools that achieve these things and we are striving to
refine them so that our people management system operates as effectively as our
investment management system.
Even with its imperfections, our evidence-based approach to learning about
people, guiding them, and sorting them is much fairer and more effective than
the arbitrary and subjective management systems that most organizations still
rely on. I believe that the forces of evolution will push most organizations
toward systems that combine human and computer intelligence to program
principles into algorithms that substantially improve decision making.
In the Appendix, I’ve provided detailed descriptions of a number of the tools
and protocols that support this idea-meritocratic approach and reinforce the
behaviors that people need to operate consistently with it. They are designed to
help us achieve our goals of 1) learning what people are like, 2) sharing what
people are like, 3) providing personalized training and development, 4) offering
guidance and oversight in specific situations, and 5) helping managers sort
people into the right roles or out of the company based on what they are like and
what is required.
You don’t need to use these same tools and protocols for your own idea
meritocracy, but you should have ways of producing the internalized learning
that it will require. While ours have evolved a lot, yours don’t have to be as
fancy or automated. For example, providing a form or a template to help guide
people through the steps required for them to manage their work or carry out a
process will yield better results than expecting them to just remember—or figure
it out—on their own.
How you decide to use tools and protocols is up to you. The main point I
want to make here is that they’re important.
16 And for Heaven’s Sake, Don’t
Overlook Governance!
All that I’ve said thus far will be useless if you don’t have good governance.
Governance is the oversight system that removes the people and the processes if
they aren’t working well. It is the process that checks and balances power to
assure that the principles and interests of the community as a whole are always
placed above the interests and power of any individual or faction. Because
power will rule, power must be put in the hands of capable people in key roles
who have the right values, do their jobs well, and will check and balance the
power of others.
I didn’t realize the importance of this sort of governance until after I
transitioned out of the CEO role, because I was an entrepreneur and company
builder (as well as an investment manager) who largely did what I thought was
best. While I needed and developed double-checks on myself—I created a
Management Committee that I put above me so that I had to report to it—I
always had the power of my equity to change things, though I never used it.
Some might say that I was a benevolent despot because while I had all the power
(the complete voting rights), I exercised my power in an idea-meritocratic way,
recognizing that the good of the whole was best for us all, and that I needed to be
double-checked. I certainly did not create the sort of governance system
appropriate for Bridgewater, given its scale.
For example, Bridgewater didn’t have a board of directors overseeing the
CEOs, there were no internal regulations, no judicial system for people to appeal
to, and no enforcement system, because we didn’t need them. I, with the help of
others, simply created the rules and enforced them, though everyone had the
right to appeal and overturn my and others’ judgments. Our principles were the
equivalent of what the Articles of Confederation had been to the United States in
its first years, and our policies were like our laws, but I never created a formal
way of operating such as a “Constitution” or a justice system to enforce them
and resolve disputes. As a result, when I stepped out and passed the power to
others, confusions about decision rights arose. After conferring with some of the
world’s greatest experts on governance, we put a new system in place based on
these principles. Still, I want to make clear that I don’t consider myself an expert
on governance and can’t vouch for the following principles as much as I can
vouch for the previous ones, because they are still new as of this writing.
16.1 To be successful, all organizations must have
checks and balances.
By checks, I mean people who check on other people to make sure they’re
performing well, and by balances, I mean balances of power. Even the most
benevolent leaders are prone to becoming more autocratic, if for no other reason
than because managing a lot of people and having limited time to do it requires
them to make numerous difficult choices quickly, and they sometimes lose
patience with arguments and issue commands instead. And most leaders are not
so benevolent that they can be trusted to put the organization’s interests ahead of
their own.
a. Even in an idea meritocracy, merit cannot be the only determining factor in assigning
responsibility and authority. Appropriate vested interests also need to be taken into
consideration. For example, the owners of a company might have vested
interests that they are perfectly entitled to that might be at odds with the vested
interests of the people in the company who, based on the idea meritocracy, are
most believable. That should not lead the owners to simply turn over the keys to
those leaders. That conflict has to be worked out. Since the purpose of the idea
meritocracy is to produce the best results, and the owners have the rights and
powers to assess that, of course they will make the determination—though I
recommend they choose wisely.
b. Make sure that no one is more powerful than the system or so important that they are
irreplaceable. For an idea meritocracy, it is especially important that its
governance system is more powerful than any individual—and that it directs and
constrains its leaders rather than the other way around. The Chinese leader Wang
Qishan drew my attention to what happened in ancient Rome when Julius Caesar
revolted against the government, defeated his fellow general Pompey, seized
control of the Republic from the Senate, and named himself emperor for life.
Even after he was assassinated and governance by the Senate was restored,
Rome would never again be what it was; the era of civil strife that followed was
more damaging than any foreign war.
c. Beware of fiefdoms. While it’s great for teams and departments to feel a strong
bond of shared purpose, loyalty to a boss or department head cannot be allowed
to conflict with loyalty to the organization as a whole. Fiefdoms are
counterproductive and contrary to the values of an idea meritocracy.
d. Make clear that the organization’s structure and rules are designed to ensure that its
checks-and-balances system functions well. Every organization has its own way of
doing this. The diagram on the next page is a sketch of my conceptualization of
how this should work for Bridgewater, which is currently an organization of
about 1,500 people. The principles it follows, however, are universal; I believe
that all organizations need some version of this basic structure.
There are one to three chairmen working with seven to fifteen board members
supported by staff, whose purpose is primarily to assess whether: 1) The people
running the company are capable; 2) The company is operating in accordance
with its agreed-upon principles and rules. The board has the power to select and
replace the CEOs, but doesn’t engage in the micromanagement of the firm nor
the people running it, though in the event of an emergency, they can drop into a
more active role. (They can also help the CEOs to the extent they want it.) While
Bridgewater’s idea meritocracy is ideally all-inclusive, there need to be various
circles of authority, trust and access to information, and decision-making
authority, which are shown in the chart’s three circles.
e. Make sure reporting lines are clear. While this is important throughout the
organization, it is especially important that the reporting lines of the board (those
doing the oversight) are independent of the reporting lines of the CEOs (those
doing the management), though there should be cooperation between them.
f. Make sure decision rights are clear. Make sure it’s clear how much weight each
person’s vote has so that if a decision must be made when there is still
disagreement, there is no doubt how to resolve it.
g. Make sure that the people doing the assessing 1) have the time to be fully informed
about how the person they are checking on is doing, 2) have the ability to make the
assessments, and 3) are not in a conflict of interest that stands in the way of carrying out
oversight effectively. In order to assess well, one has to gain a threshold level of
understanding and that takes time. Some people have the ability and the courage
to hold people accountable, while most don’t; having such ability and courage is
essential. And the person doing the assessing must not have conflicts of interest
—such as being in a subordinate position to the person they are intended to
check on—that stand in the way of holding them accountable, including
recommending that they be fired.
h. Recognize that decision makers must have access to the information necessary to make
decisions and must be trustworthy enough to handle that information safely. That
doesn’t mean that all people must have access and be trustworthy. It is possible
to have subcommittees who have access to sensitive information and make
recommendations to the board that are substantiated with enough information to
make good judgments, but without disclosing the highly sensitive particulars.
16.2 Remember that in an idea meritocracy a single
CEO is not as good as a great group of leaders.
Dependence on one person produces too much key-man risk, limits the range of
expertise (because nobody is good at everything), and fails to establish adequate
checks and balances. It also creates a burden because there’s generally too much
to do. That’s why we have a co-CEO model at Bridgewater that is essentially a
partnership of two or three people who lead the firm.
At Bridgewater the CEOs are overseen by a board largely via the executive
chairman or chairmen. In our idea meritocracy, the CEOs are also held
accountable by the employees of the company, even though these employees are
subordinate to the CEOs. The challenge of having two or three people is for
them to dance well together. If they can’t do that, and coordinate well with the
chairmen, they have to notify the executive chairman or chairmen so changes
can be made.
For the same reason we have more than one CEO overseeing management of
the company, we have more than one chief investment officer (there are
currently three).
16.3 No governance system of principles, rules, and
checks and balances can substitute for a great
partnership.
All these principles, rules, and checks and balances won’t be worth much if you
don’t have capable people in positions of power who instinctually want to
operate for the good of the community based on the agreed-upon principles. A
company’s leaders must have wisdom, competence, and the ability to have close,
cooperative, and effective working relationships characterized by both
thoughtful disagreement and commitment to following through with whatever
the idea-meritocratic process decides.
We work with others to
get three things:
1) Leverage to
accomplish our chosen
missions in bigger and
better ways than we
could alone.
2) Quality relationships
that together make for a
great community.
3) Money that allows us
to buy what we need and
want for ourselves and
others.
WORK PRINCIPLES: PUTTING IT ALL TOGETHER
Since the relative importance of these three things varies by person, it is up to
you to determine the quantities and mix you want. The important thing to realize
is that they are mutually supportive. If you want to accomplish your mission,
you will be better off having quality relationships with people committed to that
mission and financial resources to put behind it. Similarly, if you want to have a
great work community, you will need a shared mission and financial resources to
support you, and if you want to make the most money possible, you will need
clear goals and tight relationships to achieve them. In my life, I have been lucky
to have much more of all three of these than I could have ever imagined. I have
tried to convey the approach that worked for me—an idea meritocracy in which
meaningful work and meaningful relationships are the goals and radical truth
and radical transparency are the ways of achieving them—so that you can decide
what, if any of it, is of use to you.
Recognizing that I gave you a pile of principles that could be confusing, I
want to make sure that the headline I’m trying to get across comes through. It is
that of all approaches to decision making, an idea meritocracy is the best.40 It’s
almost too obvious to warrant saying, but I will anyway: Knowing what you can
and cannot expect from each person and knowing what to do to make sure the
best ideas win out are the best way to make decisions. Idea-meritocratic decision
making is better than traditional autocratic or democratic decision making in
almost all cases.
That’s not just theory. While there is no such thing as utopia just like there is
no such thing as perfect, there is great—and there isn’t much doubt that the
results of this idea-meritocratic approach have been pretty great for Bridgewater
for more than forty years. Because this approach can work equally well in most
organizations, I wanted to lay it out clearly and in detail. While you needn’t
follow this idea-meritocratic approach exactly as I’ve done it, the big question is:
Do you want to work in an idea meritocracy? If so, what is the best way for you
to do that?
An idea meritocracy requires people to do three things: 1) Put their honest
thoughts on the table for everyone to see, 2) Have thoughtful disagreements
where there are quality back-and-forths in which people evolve their thinking to
come up with the best collective answers possible, and 3) Abide by ideameritocratic ways of getting past the remaining disagreements (such as
believability-weighted decision making). While an idea meritocracy doesn’t
have to operate exactly in any particular way, it does have to by and large follow
those three steps. Don’t worry about remembering all the particular principles
that I gave you in this book. Just go after having an idea meritocracy and figure
out what works for you by encountering your trade-offs and coming up with
your principles for handling them.
In my case, I wanted meaningful work and meaningful relationships, and I
believed that being radically truthful and radically transparent were required to
get those. Then I went after them and encountered problems that forced me to
make choices. By writing down how I made these choices, I was able to flesh
out my principles, which led me to shape Bridgewater’s idea meritocracy with
the people I worked with so that it would work well for us. As you set out on
your own and encounter your own impediments, you might want to refer back to
these principles because chances are that I’ve encountered many of the same
impediments, did my wrestling with how to handle them, and laid out my
thinking in principles. And then write down your own.
Of course, people’s abilities to influence how their group works vary, and I
don’t know your circumstances. But I do know that if you want to work in an
idea-meritocratic way, you can find your own way of doing that. Maybe it will
be by helping shape your organization from the top, maybe it will be by
choosing the right organization for you, and maybe it will be by simply dealing
with the people you work with in an idea-meritocratic way. No matter your
position, you can always practice being open-minded and assertive at the same
time, and thinking about your and others’ believabilities when deciding what to
do.
Above all else, my wishes for you are that: 1) You can make your work and
your passion one and the same; 2) You can struggle well with others on your
common mission to produce the previously mentioned rewards; 3) You can
savor both your struggles and your rewards; and 4) You will evolve quickly and
contribute to evolution in significant ways.
40 I’m not saying that it is always the best, as there are some cases where it’s not. I’m saying that I believe
that it is almost always the best if it can be implemented well.
It’s up to you to decide
what you want to get
out of life and what
you want to give.
ACKNOWLEDGMENTS
My Life and Work Principles are a result of my encounters with reality over
many years. Because these encounters were most importantly shaped with Bob
Prince, Greg Jensen, Giselle Wagner, Dan Bernstein, David McCormick, Eileen
Murray, Joe Dobrich, Paul Colman, Rob Fried, Ross Waller, Claude Amadeo,
Randal Sandler, Osman Nalbantoglu, Brian Kreiter, Tom Sinchak, Tom Waller,
Janine Racanelli, Fran Shanne, and Lisa Safian, they are the people to whom I
am most grateful.
Bob, Greg, and I have spent the greater parts of our adult lives trying to
discover the timeless and universal laws of economies and markets. In the
process, we had daily interactions that were typically thoughtful, infrequently
bloody, and occasionally euphoric. While our meetings were primarily about
economies and markets and led to the discovery of invaluable economic and
investment principles, they also taught us a great amount about ourselves and
about how people should be with each other. We captured these lessons as life
and work principles that were even more valuable. More recently, we did that
with Eileen Murray and Dave McCormick, who together replaced me as coCEOs. Thank you, Dave and Eileen, for contributing to, receiving, and taking
care of the boon.
When I first imagined transitioning Bridgewater from a first-generation
organization to a second-generation one, I decided to pull together my scattered
collection of principles into this recipe book to help others at Bridgewater.
Collecting and transforming what started as a messy pile of principles into this
beautiful book was an epic effort that Mark Kirby, more than anyone, was
responsible for helping me with. I also appreciate Arthur Goldwag’s and Mike
Kubin’s contributions in tightening up and refining the entire manuscript. (Mike
did that as a friend.) I further appreciate Arianna Huffington, Tony Robbins,
Norm Rosenthal, and Kristina Nikolova for taking the time to read the book and
provide valuable suggestions.
Those who enabled me most on a daily basis were “Ray’s Angels” (Marilyn
Caufield, Petra Koegel, Kristy Merola, and Christina Drossakis), “Ray’s
Leveragers” (Zack Wieder, Dave Alpert, Jen Gonyo, and Andrew Sternlight—
and past leveragers Elise Waxenberg, David Manners-Weber, and John Woody),
and “Ray’s Researchers” (Steven Kryger, Gardner Davis, and Brandon Rowley
—and past researcher Mark Dinner). I am also thankful to Jason Rotenberg,
Noah Yechiely, Karen Karniol-Tambour, Bruce Steinberg, Larry Cofsky, Bob
Elliott, Ramsen Betfarhad, Kevin Brennan, Kerry Reilly, and Jacob Kline, who
are among the next generation who help spark and shape our investment
principles; to Jeff Gardner, Jim Haskel, Paul Podolsky, Rob Zink, Mike Colby,
Lionel Kaliff, Joel Whidden, Brian Lawlor, Tom Bachner, Jim White, Kyle
Delaney, Ian Wang, Parag Shah, and Bill Mahoney, who have personified our
principles to our clients; to Dave Ferrucci, who, more than anyone else, has
helped me convert the Work Principles into algorithms; and to Jeff Taylor, Steve
Elfanbaum, Stuart Friedman, and Jen Healy, who are helping me convert them
into common sense for a lot of people. Though my interests and directions have
always been diverse, these teams made my missions their missions, and kept me
moving forward. Without their help, I wouldn’t have accomplished anything
close to what I have. Thank you for enduring me and for selflessly supporting
me.
Whatever beauty you see in the book’s design was the result of Phil
Caravaggio’s generosity and talent. After I put the original version of Principles
online as a PDF, he came to me as a stranger bearing the gift of a gorgeously
designed print edition, created with the help of the artistic book designer
Rodrigo Corral. Phil, who is a brilliant entrepreneur in his own right, just wanted
to thank me because the principles had helped him. The book’s beauty astounded
me, and Phil’s account of what these principles meant to him was another gift
that nudged me closer to making the book a reality. Once I decided to make it,
Phil went on to work tirelessly with Rodrigo to shape the aesthetic of what you
are now holding in your hands—doing so again solely as a gift. Thank you, Phil!
Six years ago, Jofie Ferrari-Adler, Executive Editor at Simon & Schuster,
read the principles online, found them valuable, and explained to me why
sharing this book was an important thing for me to do to help others. He has
been a valued partner in making that happen. In exploring my publishing
options, I triangulated with others to find the best agent available. This search
led me to Jim Levine. I learned why he is so admired by his clients as he
provides his great time, skill, and empathy. Jim guided me through the
publishing process, which led me to Jon Karp, Simon & Schuster’s President.
From the start, Jon wanted my book to be more what I wanted it to be than what
he wanted it to be, and he helped me make it happen.
Finally, I’d like to thank my wife, Barbara, and my sons Devon, Paul, Matt,
and Mark for putting up with me and my principles—and for giving me the time
and space to create both these principles and this book.
ABOUT THE AUTHOR
Ray Dalio, who grew up a very ordinary middle-class kid from Long Island,
started the investment company Bridgewater Associates out of his two-bedroom
apartment when he was 26 years old, and built it over the next 42 years into what
Fortune magazine assessed to be the fifth most important private company in the
U.S. He did that by creating a unique culture—an idea meritocracy based on
radical truth, radical transparency, and believability-weighted decision making—
that he believes most people and organizations can use to better achieve their
own goals.
Along the way, Dalio became one of the 100 most influential (according to
Time) and 100 wealthiest (according to Forbes) people in the world, and because
his unique investment principles changed the industry, CIO magazine called him
“the Steve Jobs of investing.” (Those principles will be conveyed in his next
book, Economic and Investment Principles.) He believes that his success isn’t
due to anything special about him—it is the result of principles he learned,
largely by making mistakes, from which he also believes most people can
benefit.
At 68 years old, Dalio’s primary objective is to pass along these principles in
case others find them of value.
MEET THE AUTHORS, WATCH VIDEOS AND MORE AT
SimonandSchuster.com
Authors.SimonandSchuster.com/Ray-Dalio
CONCLUSION
As I said at the outset, my goal is to pass along the principles that worked well
for me; what you do with them is up to you.
I of course hope that they will help you visualize your own audacious goals,
navigate through your painful mistakes, have quality reflections, and come up
with good principles of your own that you will systematically follow to produce
outcomes that vastly exceed your expectations. I hope that they will help you do
these things both individually and when working with others. And, since your
journey and evolution will certainly be a struggle, I hope that these principles
will help you struggle and evolve well. Perhaps they will even inspire you and
others to put your principles in writing and collectively figure out what’s best in
an idea-meritocratic way. If I could tilt the world even one degree more in that
direction, that would thrill me.
Along these lines, there is more to come. Because I know that having tools
and protocols is necessary to helping people convert what they want to do into
actually doing it, I will soon be making the ones we’ve created available to you.
I feel I have now done the best I can to pass along my Life and Work
Principles. Of course, we aren’t done with our struggles until we die. Since my
latest struggle has been to pass along whatever I have that has been of value, I
feel a certain sense of relief to have gotten these principles out to you, and a
sense of contentment as I end this book and turn my attention to passing along
my economic and investment principles.
APPENDIX
TOOLS AND PROTOCOLS FOR BRIDGEWATER’S
IDEA MERITOCRACY
What follows is a quick overview of many of the tools and processes currently in
use at Bridgewater. It’s my intention to soon share many of these with the wider
world in a Principles app so you can try them out for yourself.
COACH
Because there are too many principles for anyone to keep top of mind enough to
apply appropriately to whatever situation they face, and because it’s easier to ask
for advice than to seek it out in a book, I created Coach. Coach’s platform is
populated with a library of common situations, or “ones of those” (e.g.,
disagreeing with an assessment someone made, someone lied or did something
unethical, etc.), which are linked to the relevant principles to help people handle
them. As people use Coach, they give feedback on the quality of advice it
provides, essentially coaching the Coach so that it can deliver better and better
advice. Over time, Coach has become increasingly effective in much the same
way Siri has.
DOT COLLECTOR
The Dot Collector is an app used in meetings that allows people to express their
thoughts and see others’ thoughts in real time, and then helps them collectively
reach an idea-meritocratic decision. It surfaces people’s thinking, analyzes it,
and uses the information to help people make real-time decisions better in a few
ways. Specifically:
• Participants continuously record their assessments of each other by giving
them “dots,” positive or negative, on any number of several dozen attributes.
These dots are laid out in a grid that updates dynamically, so that everyone
in the conversation can see one another’s thinking as the meeting progresses.
Doing this helps people shift their perspectives from being stuck in their own
heads with their own opinions to looking down on everyone’s views. Seeing
things through everyone’s eyes naturally causes most people to adopt the
higher-level view in which they recognize that their own perspective is just
one of many, so they ask themselves which criteria are best for deciding how
to resolve the issue at hand. In this way it promotes open-minded, ideameritocratic, collective decision making.
• It helps people make better decisions by providing advice in the same way a
GPS does. By taking data on what everyone in the room is like, the app is
able to give people individualized coaching, which is especially important
when their own opinions are unlikely to be right. We have found that helping
people through such times can be invaluable.
• The Dot Collector highlights what we call “nubby questions”—cases where
the pattern of answers and attributes of people on different sides of an issue
suggest that there’s an important disagreement to be resolved. For example,
it will alert you automatically if you disagree with the believabilityweighted majority on a given issue and give you guidance on the appropriate
steps to take to resolve that disagreement in an evidence-based way.
• It enables believability-weighted voting. The Dot Collector provides both a
polling interface where people can vote yes or no (or provide a numerical
rating) and a back-end system of believability weighting, which allows us to
look at vote results on both equal-weighted and believability-weighted bases,
not as just simple majorities but also based on which way the people whose
views have the most merit voted. While this may sound complicated, it’s
simply a way of helping people keep track of believability without having to
remember who is more believable at what.
BASEBALL CARDs
In addition to collecting “dots” about people in meetings, we collect data on our
people in numerous other ways (reviews, tests, the choices people make, etc.).
All these dots are analyzed via computerized algorithms based on stress-tested
logic in order to create pointillist pictures of what people are like. That logic is
typically shared with and vetted by the people in the company to help its
objectivity and believability. We then capture these pictures in Baseball Cards,
which are a simple way of presenting a person’s strengths and weaknesses and
the evidence behind them (in much the same way as a baseball card does for a
professional baseball player).
I found that we needed to have these and refer to them regularly because
without them, people tended to interact with each other without any regard to
who was good or bad at what. For example, Baseball Cards are useful in
meetings, where they allow people to assess the qualities of whoever is
expressing a point of view to determine the merit of that opinion. As a
supplement to Baseball Cards, we developed another tool called the People
Profile, which takes all the data from Baseball Cards (which have grown
complex over time) to provide a simple, text-based summary of what each
person is like. Over time, this is meant to provide employees with a systemized
synthesis that captures Bridgewater’s best thinking about what someone is like.
We work with the people being assessed to compare these pictures with the
assessed person’s own perceptions. In this way of seeking alignment between the
process and the person’s self-perception, both the processes and the confidences
in the perceptions are improved.
In order to match people to jobs, I developed the Combinator, which takes
the data from the Baseball Cards and allows one to look at people based on their
key attributes and compare them to one another. If you’re looking for a certain
type of person to fill a role, you can enter a few names of people who fit the
image, and the Combinator will call up the precise data on what those people are
like, synthesize the key qualities that make them that way, and then search the
database to help you find other similar people. The Combinator can also be used
to generate job specifications (based on the type of person you are looking for)
that you can apply both inside and outside the company.
ISSUE LOG
The Issue Log is our primary tool for recording our mistakes and learning from
them. We use it to bring all problems to the surface, so we can put them in the
hands of problem solvers to make systematic improvements. It acts like a water
filter that catches garbage. Anything that goes wrong must be “issue logged”
with the severity of the issue and who is responsible for it specified, so that it’s
easy to sort through most problems. Issue logs also provide paths for diagnosing
problems and the information pertaining to them. In that way, they also provide
effective metrics of performance, as they allow you to measure the numbers and
types of problems coming up (and identify the people who are contributing to
them and fixing them).
The Issue Log is a good example of a tool that changed habits and
perceptions. A common challenge people had at first was openly pointing out
mistakes, because some people instinctively viewed pointing out mistakes as
hurtful to the people who made them. Once they got used to doing this, they
realized the benefit of it and they got in the good habit of doing it. Now most
people can’t do without it.
PAIN BUTTON
I believe Pain+Reflection=Progress. In other words, pain is an impor-tant signal
that there is something to be learned, and if you reflect on your pain well, you
will almost always learn something important. That prompted me to create the
Pain Button.
The moment someone experiences pain is the best time for them to record
what the pain is like, but it’s a bad time to reflect because it’s hard to keep a
clear head. So the app is designed to let people record the emotions they are
feeling (anger, disappointment, frustration, etc.) as they feel them and then come
back at a later time to reflect on them using guided reflection questions. The tool
prompts the people who experienced the pain to specify what they will do to deal
with that situation, so that the pain is mitigated in the future (for example, have a
quality conversation with the person who is causing the pain, etc.). There is a
part of the app that shows the frequency of the pain and the causes of the pain
and whether the actions were followed through and productive. In that way, one
receives a sort of biofeedback connection among the pain that occurred, the
diagnosis of it, the plan for improvement so that the problems are reduced or
eliminated, the following through on these plans, and the results produced. The
tool creates a template for looping toward improvement that everyone can see. It
allows you to share your entries with others or keep them to yourself. Some
people have described the Pain Button as like having a psychologist in your
pocket, although better as it’s always available and a hell of a lot cheaper.
DISPUTE RESOLVER
Disputes need clear paths toward resolution. That is especially so in an idea
meritocracy where people are expected to disagree and create paths for resolving
disagreements. The Dispute Resolver provides paths for resolving
disagreements in an idea-meritocratic way. It asks a series of questions used to
guide the people through the resolution process. One of its features is that it
locates believable people who can help determine whether a disagreement is
worth taking up at a higher management level. The app also makes clear to
everyone that if they have a different point of view from others, it’s up to them
to express it and work to get in sync—instead of privately holding on to the view
and not putting it on the table. Whether you have a tool like the Dispute Resolver
or not, you must have a clear and fair system to resolve disputes in order to
ensure there is a real idea meritocracy. Otherwise the person with greater power
could pull rank on the person with lesser power.
We also have a number of tools that help us complete and oversee our day-today work and stay in sync regarding how things are going.
DAILY UPDATE TOOL
For years, I have asked each person who reports to me to take about ten to
fifteen minutes to write a brief email of what they did that day, the issues
pertaining to them, and their reflections. By reading these updates and
triangulating them (in other words, seeing different people’s takes on what they
are doing), I can gauge how they are working together, what their moods are,
and which threads I should pull. Over the last few years, I’ve developed this into
a software application that pulls these updates into a dashboard, which makes
them much easier to track, record metrics, and respond to than dealing with
dozens of separate email threads. It also allows people to easily provide helpful
data—like their morale, how heavy their workload is, issues they want to
escalate—on a daily basis. I and those I work with find this simple tool
invaluable in helping us stay in sync. Also, at the company level, it provides
valuable information for taking the daily pulse of what’s going on (morale,
workloads, specific issues, who is doing what, etc.).
CONTRACT TOOL
How often have you ended a meeting with everybody saying we should do this
or that, but then everybody walks off and nothing actually happens because
people lose track of what was agreed upon? Implicit contracts are pretty much
worthless; the commitments people make to each other need to be explicit to be
actionable—and firm enough to hold each other accountable. The Contract
Tool is a simple app that lets people make and monitor their commitments to
each other. It helps both the people who requested things, and those who are
required to provide those things, to easily stay on top of them.
PROCESS FLOW DIAGRAM
Just as an engineer uses flow charts to understand the workflow of what they’re
designing, a manager needs a Process Flow Diagram to help visualize the
organization as a machine. It might have references to an organizational chart
that shows who reports to whom, or the org chart might supplement the Process
Flow Diagram. Ideally the Process Flow Diagram is made in a way that allows
you to both see things simply at a high level and drop down to lower levels of
detail as needed (e.g., when looking at a person in the diagram, one can click
into their Baseball Card and view other info about them).
At Bridgewater, we’ve created process maps for every department in the
company that show us clearly all the roles and the responsibilities for each role
and how the work flows among them to reach intended outcomes.
POLICY AND PROCEDURES MANUALS
This is the compendium of policies and procedures that people can consult as
one would an operating manual. It’s a living document in which the
organization’s learning is codified.
METRICS
As the saying goes, “You can’t manage what you can’t measure.” By measuring
how your machine is working, you can manage it more easily, especially if you
can enlist the help of algorithms to do a lot of your thinking and work for you.
Good metrics come about by first thinking of what information you need to
answer your pressing questions and then figuring out how to get it. They do not
come about by gathering information and putting it together to see what it tells
you. At Bridgewater, we talk about four helpful steps to creating good metrics:
1) know what goal your business is achieving, 2) understand the process for
getting to the goal (your “machine” with its people and design), 3) identify the
key parts in the process that are the best places to measure, so you know how
your machine is working to achieve that goal, and 4) explore how to create
levers, tied to those key metrics, that allow you to adjust your process and
change your outcomes. To that end, we encourage employees to construct our
metrics in conjunction with process flow diagrams and procedures manuals.
The test of the effectiveness of metrics lies in whether they can tell you what
and who is doing well and poorly, all the way down to specific people. We aim
to have metrics that cascade from the most important matters the CEOs are
responsible for at the company level, down through the departments, to the
teams within them and the people responsible in each role.
BIBLIOGRAPHY
Aamodt, Sandra, and Sam Wang. Welcome to Your Brain: Why You Lose Your Car Keys but
Never Forget How to Drive and Other Puzzles of Everyday Life. New York: Bloomsbury
Publishing, 2009.
Beauregard, Mario, and Denyse O’Leary. The Spiritual Brain: A Neuroscientist’s Case for the
Existence of the Soul. San Francisco: HarperOne, 2007.
Campbell, Joseph. The Hero with a Thousand Faces. Princeton: Princeton University Press,
1949.
Dalai Lama XIV. Beyond Religion: Ethics for a Whole World. Boston: Houghton Mifflin
Harcourt, 2011.
Dawkins, Richard. River Out of Eden: A Darwinian View of Life. New York: Basic Books,
1995.
Duhigg, Charles. The Power of Habit: Why We Do What We Do in Life and Business. New
York: Random House, 2012.
Durant, Will, and Ariel Durant. The Lessons of History. New York: Simon & Schuster, 1968.
Eagleman, David. Incognito: The Secret Lives of the Brain. New York: Pantheon Books, 2011.
Gardner, Howard. Changing Minds: The Art and Science of Changing Our Own and Other
People’s Minds. Cambridge: Harvard Business Review Press, 2006.
Gazzaniga, Michael S. Who’s in Charge?: Free Will and the Science of the Brain. New York:
Ecco Books, 2011.
Grant, Adam. Originals: How Non-Conformists Move the World. New York: Viking, 2016.
Haier, Richard J. The Intelligent Brain. Chantilly, VA: The Great Courses Teaching Company,
2013.
Hess, Edward D. Learn or Die: Using Science to Build a Leading-Edge Learning
Organization. New York: Columbia Business School Publishing, 2014.
Kahneman, Daniel. Thinking, Fast and Slow. New York: Farrar, Straus & Giroux, 2011.
Kegan, Robert. The Evolving Self: Problem and Process in Human Development. Cambridge:
Harvard University Press, 1982.
Kegan, Robert. In Over Our Heads: The Mental Demands of Modern Life. Cambridge:
Harvard University Press, 1998.
Kegan, Robert, and Lisa Laskow Lahey. An Everyone Culture: Becoming a Deliberately
Developmental Organization. Cambridge: Harvard Business Review Press, 2016.
Lombardo, Michael M., Robert W. Eichinger, and Roger P. Pearman. You: Being More
Effective in Your MBTI Type. Minneapolis: Lominger Limited, 2005.
Mlodinow, Leonard. Subliminal: How Your Unconscious Mind Rules Your Behavior. New
York: Pantheon Books, 2012.
Newberg, Andrew, MD, and Mark Robert Waldman. The Spiritual Brain: Science and
Religious Experience. Chantilly, VA: The Great Courses Teaching Company, 2012.
Norden, Jeanette. Understanding the Brain. Chantilly, VA: The Great Courses Teaching
Company, 2007.
Pink, Daniel H. A Whole New Mind: Why Right-Brainers Will Rule the Future. New York:
Riverhead Books, 2005.
Plekhanov, G. V. On the Role of the Individual in History. Honolulu: University Press of the
Pacific, 2003. (Original work published 1898)
Reiss, Steven. Who Am I? The 16 Basic Desires That Motivate Our Actions and Define Our
Personalities. New York: Berkley, 2002.
Riso, Don Richard, and Russ Hudson. Discovering Your Personality Type: The Essential
Introduction to the Enneagram, Revised and Expanded. New York: Mariner Books, 2003.
Rosenthal, Norman E, MD. The Gift of Adversity: The Unexpected Benefits of Life’s
Difficulties, Setbacks, and Imperfections. New York: TarcherPerigee, 2013.
Taylor, Jill Bolte. My Stroke of Insight: A Brain Scientist’s Personal Journey. New York:
Penguin Books, 2009.
Thomson, J. Anderson, with Clare Aukofer. Why We Believe in God(s): A Concise Guide to the
Science of Faith. Charlottesville: Pitchstone Publishing, 2011.
Tokoro, M., and K. Mogi, eds. Creativity and the Brain. Singapore: World Scientific
Publishing, 2007.
Wilson, Edward O. The Meaning of Human Existence. New York: Liveright Publishing
Corporation, 2014.
INDEX
A note about the index: The pages referenced in this index refer to the page numbers in the print edition.
Clicking on a page number will take you to the ebook location that corresponds to the beginning of that
page in the print edition. For a comprehensive list of locations of any word or phrase, use your reading
system’s search function.
abilities, 407–8, 435–36
above-the-line conversations, 247
accountability, 402, 468–70
accuracy, in evaluations, 426–27
advancers, 228
advice, 387
AI (artificial intelligence), 262–65
algorithms, 257–62
alignment, 369
see also sync, getting in
answers, 189, 459–60
approximations, 244–46
arguing vs. seeking to understand, 190
assertiveness, 362–64, 365–66
assessments of others, 176, 225–31, 430–35, 438, 535
attributes, positive and negative aspects of, 210–14
auditors, 513
bad behavior, 514
badmouthing, 327–28
barriers, 183–87
blind spot, 185–87, 199, 511
behavior:
change in, 526–27
standards of, 386–87
believability, 190
choosing believable people, 381
comparing your own with others’, 199
in decision making, 256–57, 307–14, 370–83
oversight and, 503
Responsible Parties and, 381
track records in, 380
triangulating and, 193–95
and understanding others’ reasoning, 375–76
below-the-line conversations, 247
bets, 253
big picture, 512–13
blame and credit, 352
blind spots, 185–87, 199, 511
brain, 218–25
“by-and-large” statements, 244–46
capability, 299, 414–15, 490
career paths, 423–24
celebration, 523
change, 136, 244, 411, 434, 526–27
character, 299, 414–15
checklists, 523
checks and balances, 532–36
circumstances, 489
cleansing storms, 502
closed-minded people, 196–98, 362–63
clover-leaf design, 511
collaboration, 368–69, 415
common sense, 251
communication(s):
aimed at educating or boosting cohesion, 383
aimed at getting best answer, 382
clarity in, 470
and different ways of thinking, 460–61
leveraging, 367–68
opportunities for, 479
precision in, 365
types of, 365
see also conversations
compensation, 416–17
complaints, 362, 387
completion, pushing through to, 177–78
compliments, 426, 428
compromise, 305–7
computer algorithms, 257–62
confidence, 457, 527–29
conflicts:
important, 388–89
relationships and, 360
see also disagreements
conscious vs. unconscious mind, 218–19
consequences:
Responsible Parties and, 402
second- and third-order, 155–56, 501
consideration, 343–44, 417
consultants, 507–8
controls, 513–14
conversations:
above-the-line and below-the-line, 247
completion in, 367
logic of, 366
managing, in meetings, 364–68
about mistakes, 433–34
navigating between levels of, 366
see also communication
creators, 228
credit and blame, 352
criticisms, 329–30, 364, 426, 428
culture and people, 299–305
daily updates, 459
data, 527–29
debating, 380, 387
see also disagreements
decisions, decision making:
algorithms and, 257–62
believability weighting, 256–57, 307–14, 370–83
challenging, considering broader context for, 387
choosing Responsible Parties, 401
complaining, advice-giving, and debating vs., 387
criteria for, 499–500
decision rights in, 535
delaying, evaluating benefits vs. costs of, 254–55
and disagreement with consensus, 381
effective, 234–65
emotions and, 236–37
evidence in, 200–201
as expected value calculations, 251–53
fairness vs. getting your way in, 383
faith in, 201–2
group, 366
information access and, 536
levels and, 247–50
past, evaluating, 488–89
pros and cons in, 253
by Responsible Parties, 381
supporting, in spite of disagreement, 389–91
as two-step process, 188, 236–37
and who to ask questions of, 238
delegation, 456
departments, 505, 508, 510
desires, 172–73
determination, 134–35, 161–62
difficult things, doing, 462
disagreements, 384–97
efficiency in, 380–81
and getting in sync, 361–62
getting stuck in, 388–89
important, 388–89
on little things, 388
supporting decisions in spite of, 389–91
surfacing, 299–305, 361
thoughtful, 190–92
triangulating and, 193–95
dishonesty, 329–30, 513–14
distractions, 452
doing what you set out to do, 518–23
dots, 237–46, 429
double-doing, 506–7
dreams, 134–35
drill-down technique, 492–94
ego barrier, 183–84
80/20 rule, 246, 492–94
emotions, 219–20, 227, 236–37
empathizing, 189
enemies, 335
escalation, 471
evaluations, 426–27, 429–30, 438
everything and nothing, being, 149
evidence, 161, 200–201
evolution, 142–45, 423–25
as accomplishment and reward, 147–50
death and, 145–47
maximizing, 150–52
mistakes as part of, 351–52
executors, 228
expectations, 173, 176
experience, 376, 413
extroversion, 226
failure, 351, 440–41, 468
fairness, 344–45, 383, 416, 527–29
fast talkers, 367
fears, of what others think, 137
feedback, 425
feelings, 219–20, 227, 236–37
fiefdoms, 533
firing people, 439–40
5-Step Process, 168–81, 488, 504
flexibility, 173
flexors, 228
Frog in the Boiling Water Syndrome, 476
frustration, 522
generosity, 344–45, 417
genetic programming, 215–17
goal(s):
achieving, vs. looking good, 188–89, 352, 363
building organization around, 502–8
clarity of, 172–74
desires and, 172–73
focusing on, 229, 453
group, and individual incentives, 148
and managing as someone operating a machine, 448–71
motivation for, 520–21
outcomes and, 157–59, 450–51, 477
paths to achieving, 177
right people in the right roles in support of, 231–33
tasks vs., 229, 469, 502–8
unattainable, 173
visualization and, 176
“good,” 141–42
governance, 530–37
gravitational pull, 505
great vs. new, 238
group size, 368–69
group-think, 477
guardrails, 510–11
habits, 178, 220–22, 223
higher level, 157–62, 389–90, 450–52
hiring, 404–19
and candidate’s success elsewhere, 414
capability and character in, 414–15
interviewers and, 411
for long-term mission, 415
and matching people to the design, 407–10
and objectivity in candidates, 411
of outstanding people, 409
personal influence in, 409–10
and showing candidates the real picture, 415
and suitability for different jobs, 409, 410–11
systematic and scientific approach to, 408–9
track records and, 412–15
honorable people, 347
humility, 180–81, 378
hyperrealist, being, 134–35
idealists, 414
idea meritocracy, 307–14, 320
anarchy in, 390
assigning responsibility and authority in, 532–33
governance and, 533
leaders in, 536
and principles embedded in tools, 526–29
understanding each person’s ideas in, 374–75
and well-being of organization, 391–92
ideas, 376
see also opinions
incentives, individual, 148
information, 188, 536
integrity, 327–28
interruptions, 367
introversion, 226
intuiting vs. sensing, 226–27
investigations, 513
“I think that . . .” statements, 380
job slip, 458
job titles, 515
judgments, 189, 383, 436
justice, 332–33
key-man risk, 463, 506
kindness, 426–27
knowing and not knowing, 188, 363
leaders, group of, 536
leadership, 464–66
learning, 136–37, 189
inadequate, 435–36
internalized, 425, 526–27
mistake-based, 354
levels, 246–51
leverage, 515
leveragers, 516
life principles, 131–277
limits, pushing, 152
logic, 251, 366, 376, 527–29
lowering the bar, 442
loyalty, 328, 342
lynch mobs, 390–91
machine, 157
building, 499
and comparing outcomes with goals, 157–59
designer of, vs. worker within, 159
designing improvements to, 496–516
focusing on goal vs., 453
higher level and, 157–62
imperfection and, 501
looking down on, from higher level, 450–52
management of, 448–71
paying attention to, 452
probing and, 458–61
problems and, 176–77, 476–79, 480
visualizing, 500–501
“working through it” period and, 501–2
see also organization
management, 448–71
authoritarian, 466
delegation in, 456
distance and, 458–59
leadership, 464–66
and managers as engineers, 451
managing, micromanaging, and not managing in, 455–56
reasons for failure in, 491
senior and junior, 505
sucked-down phenomenon and, 469
understanding in, 458
martial law, 391
meaningful work and meaningful relationships:
cultivating, 338–47
genetic programming for, 215–17
as mutually reinforcing, 336
and people operating in their own interests, 346–47
and size of organization, 346
truth and transparency and, 137–38
meditation, 199–200
meetings, 364–68, 501
mental maps, 180–81
metrics, 178, 416, 429–30, 452, 470
mind, conscious vs. unconscious, 218–19
mistakes, 348–55
acceptable vs. unacceptable, 354
conversations about, 433–34
in evolutionary process, 351–52
feeling bad about, 351–52
learning and, 354
letting people make, 424–25
patterns of, 179, 352–53
mob rule, 390–91
money, 514, 516
motivation, 520–21
must-dos and like-to-dos, 254
nature, 138–47, 150–52
new vs. great, 238
no pain, no gain, 152
objective viewpoint, 159–61, 354, 431
1+1=3, 368
open-mindedness, 161–62, 198–202, 363
assertiveness and, 362–64, 365–66
radical, 136–38, 182–202, 378
signs of, 196–98, 362–63
openness, 329
operating methods, 435–36
opinions, 238, 375
believability of, see believability
critical, 329–30
past accomplishments and, 374–75, 376
reasoning behind, 379–80
optimizing for the whole, 148
organization(s):
building to fit people, 504
checks and balances in, 532–36
culture and people in, 299–305
departments in, 505, 508, 510
goals vs. tasks in, 502–8
leverage in, 515
people at tops of pyramids in, 503, 508
size of, 346, 504–5
succession and training in, 463, 505–6
top-down organization in, 503
well-being of, 391–92
see also machine
organizational chart, 508–10
outcomes, 156–57, 176–77, 435
and asking who should do what differently, 488
diagnoses and, 491
goals and, 157–59, 450–51, 477
oversight, 503
owner, thinking like, 462
pain, 152, 153–54, 174, 434–35, 500
reflection on, 152–55, 198, 353–54
partnership, 537
pay, 345, 416
peer role, 377–78
people:
allowing to step back after failure, 440–41
assessments of, 225–31, 430–35, 438, 535
building organization to fit, 504
caring about, 464
confidence in, 457
finding better fit for, vs. letting go, 440
firing, 439–40
as forces, 403
hiring, see hiring
how they operate vs. what they did, 435–36
keeping, 418
keeping in unsuitable job, 439
knowledge about, 456–57
observations about, 428–30
outstanding vs. ordinary, 409, 516
performance surveys, metrics, and reviews for, 416, 429–32
personal evolution in, 423–25
and remembering that WHO is more important than WHAT, 398–403
Responsible Parties, 381, 401, 402, 461, 471
right, in the right roles, 231–33
track records of, 412–15
training, testing, evaluating, and sorting, 420–27
transfers of, 441–42
treating appropriately, 463–64
wiring of, 204–33
perceiving vs. planning, 227–28
perfectionism, 246
performance measurements, 416, 429–32
personality assessments, 229–30, 411
perspective, 149–50, 238
plan, 176–78
clarity in communicating, 470
reflection and, 470
as resembling a movie script, 177, 500–501
time needed for, 177, 521
planning vs. perceiving, 227–28
policies, 454
possibilities vs. probabilities, 254
power, 392, 533
precise communications, 365
pressing vs. strategic issues, 512
principles, 255–56, 527–29
agreeing to ignore, 386–87
algorithms and, 257–62
policies and, 454
power and, 392
rules and, 453
suspension of, 391
systemizing, 499–500
tools and, 526–29
violation of, 488
prioritizing, 172
probabilities, 253, 254
probing, 379, 458–61
problem(s), 472–81
big vs. small, 175
and capacity vs. capability, 490
vs. cause for problem, 175
designing improvements to machine to get around, 496–516
diagnosing root causes of, 175–76, 492–95
diagnostic questions for, 485–91
difficult, fixing, 480
drill-down technique and, 492–94
Frog in the Boiling Water Syndrome and, 476
group-think and, 477
identifying, 174–75, 476–80, 478
identifying before solving, 175–76
machine and, 176–77, 476–79, 480
probing and, 459
proximate vs. root causes of, 176
as set of outcomes, 176–77
with solutions vs. without, 480
specificity in identifying, 174, 479
tolerating, 175
two levels of discussion for, 453
progress, 152–55, 495
protocols, 524–29
“public hangings,” 514
purchasing, 514
putting out without taking in, 189
questions, 238, 364, 379, 415
reality(ies), 134–35
embracing and dealing with, 132–67
harsh, avoiding, 174
synthesizing, see synthesis
see also truth
reason, 251
reasonableness, 364
references, checking, 412–13
refiners, 228
reflection, 176, 470
on pain, 152–55, 198, 353–54
rehabilitation, 438–41
relationships:
conflicts and, 360
diagnosis and, 495
see also meaningful work and meaningful relationships
responsibility(ies), 427, 455
anonymous “we” and “they” and, 479
assigning, 457–48, 515, 532–33
checklists vs., 523
and confidence in people, 457
escalation and, 471
to make sense of important things, 382–83
personal, 366
reporting lines and delineations of, 514–16, 535
Responsible Parties (RPs), 381, 401, 402, 461, 471
rest and renovation, 523
results, of doing the same things, 491
rubber-stamping, 513–14
rules, making, 453
sampling people’s work, 434
scale, 504–5
school performance, 413
self-accountability, 173
self-assessment, 225–31
self-management, 232–33
self-reflectiveness, 353–54
sensing vs. intuiting, 226–27
setbacks, 173–74
shapers, 230–31
shoulds, 140–41, 469–70
simplification, 255
skiing, 455
skills, 407–8, 436
solutions, 178–79, 480, 521
speaking up, 329
stories, both sides of, 362
strategic vs. pressing issues, 512
strength(s):
of others, 161
in personal evolution, 423–24
weakness and, 465
stress-testing, 376
student, 377–78
style vs. substance, 364
success:
5-Step Process and, 179, 504
learning from, 427
in life, 134–35
and right people in the right roles, 231–33
trappings of, 173
succession, 463, 505–6
suggestions, 364, 376
suspicious threads, 461
sync, getting in, 356–69, 468
on assessments, 433
bringing issues to the surface, 361
disagreement and, 361–62
as investment, 360
major differences and, 369
as two-way responsibility, 363
synthesis, 237–38, 491
building from specifics up, 428–29
logic, reason, and common sense in, 251
time in, 239–46
tasks:
double-doing, 506–7
goals vs., 229, 469, 502–8
tasting the soup, 478
teacher, 377–78
teams, 412
testing skills, 436
thinking, 223–24
feeling vs., 219–20, 227
threats, 463
time, 254, 516, 522
synthesis and, 239–46
tools, 524–29
topic slip, 366
tough love, 154–55, 305–7, 427–28
track records, 412–15
training, 424, 436, 438–41
transfers, 441–42
transparency, 332–33
radical, 136–38, 308–14, 322–26, 330–35
trial and error, 148–49
triangulating, 193–95
truth, 135–36, 326–27
radical, 137–38, 308–14, 322–30, 336
see also reality
two-minute rule, 367
unconscious vs. conscious mind, 218–19
understanding vs. arguing, 190
updates, 459
vacation, 462
values, 369, 407–8
verbal cues, 460
vision, 511–13
visualization, 176, 230–31, 500–501
“we,” anonymous, 460, 479
weaknesses, 159, 436–38
and finding solutions, 178–79
others’ strengths and, 161
pain of exploring, 434–35
patterns of mistakes and, 352–53
in personal evolution, 423–24
strength and, 465
wiring, 204–33
work:
amount of, 522
habits in, 178
meaningful, see meaningful work and meaningful relationships
passion and, 317
pay for, 345, 416
principles, 270–541
tools and protocols for, 524–29
Workplace Personality Inventory, 229–30
worry, 476
worst-case scenario, 194–95
“
y
o
u
s
,
”
t
w
o
,
1
8
4
–
8
5
We hope you enjoyed reading this Simon & Schuster
ebook.
Get a FREE ebook when you join our mailing list. Plus, get updates on new releases,
deals, recommended reads, and more from Simon & Schuster. Click below to sign up and
see terms and conditions.
CLICK HERE TO SIGN UP
Already a subscriber? Provide your email again so we can register this ebook and send
you more of what you like to read. You will continue to receive exclusive offers in your
inbox.
Simon & Schuster
1230 Avenue of the Americas
New York, NY 10020
www.SimonandSchuster.com
Copyright © 2017 by Ray Dalio
All rights reserved, including the right to reproduce this book or portions thereof in any form whatsoever.
For information, address Simon & Schuster Subsidiary Rights Department, 1230 Avenue of the Americas,
New York, NY 10020.
First Simon & Schuster hardcover edition September 2017
SIMON & SCHUSTER and colophon are registered trademarks of Simon & Schuster, Inc.
For information about special discounts for bulk purchases, please contact Simon & Schuster Special Sales
at 1-866-506-1949 or business@simonandschuster.com.
The Simon & Schuster Speakers Bureau can bring authors to your live event. For more information or to
book an event, contact the Simon & Schuster Speakers Bureau at 1-866-248-3049 or visit our website at
www.simonspeakers.com.
Interior design by Rodrigo Corral Art & Design
Jacket and Book Design by Rodrigo Corral (Art & Design)
Library of Congress Cataloging-in-Publication Data has been applied for.
ISBN 978-1-5011-2402-0
ISBN 978-1-5011-2405-1 (ebook)